Money and Banking n

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L E C T U R E R N A M E : J A M A I S S E M

C O U R S E N A M E : M O N E Y A N D B A N K

S E M E S T E R 7

E A S T A F R I C A U N I V E R S I T Y

Introduction to money andbank


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M E A N I N G O F M O N E Y

F U N C T I O N O F M O N E Y

F O R M O F M O N E Y

M E A S U R I N G O F M O N E Y

Money and banking: chapter one


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I. The Meaning ofMoney

y anything commonly excepted

in exchange for goods/services

many objects throughout history

y Moneyis any object or record that is generally

As payments for goods and service and repayment ofdebt

(This is why economists says Money is what moneydoes.)


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Examples of money

y Livestock

y metals

y cigarettes

y grain


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money, income, & wealth

y money

what is accepted as payment

y income

earnings during time period (year)

y wealthaccumulated assets at pt. in time

amount at a point in time

y income is a FLOW

amount during a time period


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Barter System

y The Era of hunters and gatherers.

(Subsistence Economy).

y The Domestication of plants and animals.

(Barley, wheat, sheep's, goats, dogs, and pigs).yAgriculture (food surpluses ).

Economic specialization and social stratification(elite classes, e.g. rulers).

- Transaction and markets

- Gift before market transactions (gift exchange).


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Barter system

y Before money came into use, exchange took placethrough barter system.

y Barter means direct exchange of good and services(Tit-for-Tat). In other words, barter refers toexchanging of goods and services without the use ofmoney.


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II. Functions ofMoney

y main functions ofmoneyare distinguishedas:

y medium of exchange a

y unit of account

y store of value

y Standard of deferred payments


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medium of exchange

medium of exchange is an intermediary used intrade to avoid the inconveniences of a pure bartersystem. Labour food

y

Aunit of

account is a standard monetary unit ofmeasurement of value/cost of goods, services

E.g Jon want to buy shoes fromMs smith and smithuse the money to buy computer

y money is a unit of account

money is used to measure value

way to save for future spending


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Unit account

y Accounting is simplified, as all items will be recordedin terms of monetary units.

y So people will spend less time on exchange and more

time on production.

y Money is useful measuring rod of value only ifthevalue of money itself remains constant.


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Store volue

y money is a store of value use money to save,

accumulate wealth, buy stuff later

money is liquid assety If you give up SoSh 100 worth of consumption today,

you would like to have sosh100 worth ofconsumption tomorrow.

y Money generally represents a good store of valueover a relatively short period of time.


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Standard of deferred payment

y The last function of money is as a standard ofdeferred payment, which is a logical extension ofits function as a standard unit of account.

y Examples of situations where future payments areto be made are pensions, principal and interest ondebt, salaries etc.

y As long as money maintains a constant value

through time, it will overcome the problemsassociated with making future payments withspecific commodities.


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Form of money

y commoditymoney

has its own value as a good

gold & silver coins

y fiat money

no value other than

fact that its accepted in exchange for

goods and services

Example dollar USA


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Fiat money

FiatMoney: It is that money which is not redeemableor convertible into gold or silver on demand.

- It is accepted because it has been declared legal

tender by the issuing authority and has generalacceptance as a medium of exchange.

y .


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Fiat money

y The term derives from the Latin fiat, meaning "let itbe done", as such money is established bygovernment decree.Money is now given value by a

government fiat or decree, in other wordsenforceable legal tender laws were made. By law therefusal of "legal tender" money in favor of someother form of payment is illegal.


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MeasuringMoney

y IV. MeasuringMoney

yMoney aggregates

amount of cashBUT other forms of money too

M1 is the narrowest of the money

supply measurement in USA itconsist


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M2 and M3

y M2 m1 + Deposits with post office savings.

y M3 m2 + time deposits with the commercial banks.


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m1

M1= currency in circulation

+ demand deposits

+ checkable deposits

+ travelers checks

Checkable deposit are those which you writing checkand u direct to bank to make payments


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M2

= M1

+ savings deposits

+ small time deposits

+ retail money market deposits

$7.3 trillion

M3 =M2+large denomination time deposit at all

depositor institutions term repurchase agreementat commercial bank and saving and loans

Money and Banking n

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