MONEY , BANKING, & MONETARY POLICY

An Overview of Money

Money

is anything that is generally accepted as a medium of exchange. The sets of assets in an economy that people regularly use to buy goods and services from other people.

Money is not income, and money is not wealth. Money is: a means of payment / medium of exchange
a store of value

a unit of account

What is Money?

Barter is the direct exchange of goods and services for other goods and services.
A barter system requires a double coincidence of wants for trade to take place. Money eliminates this problem. As a medium of exchange, or means of payment, money is generally accepted by buyers and sellers as payment for goods and services.

What is Money?

As a store of value, money serves as an asset that can be used to transport purchasing power from one time period to another.

What is Money?

As a unit of account, money is a standard that provides a consistent way of quoting prices.

What is Money?

Money is easily portable, and easily exchanged for goods at all times. The liquidity property of money makes money a good medium of exchange as well as a store of value.

Characteristics of MONEY
Acceptability -- people must be willing to accept it as a means of payment and in settlement of a debt Durability -- must last a reasonable length of time before deteriorating Divisibility -- to function as money an asset must be capable of division into smaller units to accommodate transactions of differing value

Characteristics of MONEY

Portability / Convenience -- to function as money an asset must be portable and easy to use, it must be light, small to carry around and easy to transfer ownership Uniformity -- money of the same value must be of uniform quality Stability of Value -- in order to fulfil its various functions (especially as a store of wealth and as a means of evaluating future payment), it must retain its value Hard for Individuals to Produce Themselves -- it must be hard to forge

FORMS of MONEY
Commodity Money money that takes the form of a commodity with intrinsic value. Something that performs the function of money and also has alternative, nonmonetary uses, e.g., gold, silver, cigarettes. For hundreds of years gold could be used directly to buy things, but it also had other uses ranging from jewelry to dental fillings.
Fiat Money/token money -- money without intrinsic value that is used as money because of government decree. Something that serves as money but has no other important uses, e.g., Coins, currency.

Definition of Money Supply (M1, M2 and M3)

Definition of Money Supply: the quantity of money available in the economy Definition of Monetary Policy: the setting of the money policymakers in the central bank

supply

by

Definition of Money Supply (M1, M2 and M3)

M1 the narrowest definition of money supply, consists of currency outside banks plus checking accounts plus travelers checks Currency held outside banks includes coins and paper money in the hands of public

Traveller's check issued in specific denominations, these are treated as cash. M1 = currency held outside banks + checking accounts + traveller's check

M1

Checking accounts An account used to deposit money at a bank or credit union. Money can be added or removed from the account by visiting the bank or writing a check. If the account earns interest, it us usually at a lower rate than a savings account. Banks may require a minimum to open or maintain the account. This type of account is usually opened after a savings account, once people need more regular access to their money.

Definition of Money Supply (M1, M2 and M3)

M2 A broader definition of money supply, it includes all of the components of M1 plus time deposits and savings deposits Time deposits (fixed deposits) interest-earning deposits with a specified maturity, which are subject to penalty for early withdrawal * Savings deposits interest-earning deposits with no specific maturity * M2 = M1 + time deposits + saving deposits

Definition of Money Supply (M1, M2 and M3)

M3 = M2 + deposits with non-bank
financial institution (e.g., deposits of finance companies and post office saving)

Stages in Development of Money (Evaluation Of Money)

In the earliest stage of human civilization, there was no use of money. The families were almost self sufficient. Each family consumed all it produced. There was no need to exchange goods and so there was no need for money. As time passed a need was felt to exchange goods directly for goods possessed by other persons. A system called barter was developed so the earliest money which came into use and was accepted in exchange of goods for goods was commodity money. As society developed, many other forms of money were developed in the payment system.

1. Commodity money

Commodity money is the money that has a value apart from its use as money. A large number of items has served as commodity money at different times and places. In primitive agriculture stage, domestic animals like cattle, goats, horses, cows, sheep, rice, grain etc were used as money. As time passed on, it was found that these commodities were not best suited as general means of making payments because there were difficulties in storing money. They also lacked the essentials of durability, transportability, divisibility, homogeneity etc.

2. Metallic Money
The next form of money was the use of uncoined metals such as gold, silver, copper as medium of exchange. Such coins had an intrinsic value(Value in themselves). It became difficult for the people to know the weight and value of the piece. The discovery of mines of gold and silver and their exhaustion caused fluctuations in the supply of money. Transportation and storage of precious metals also became dangerous. The metallic coins had now a guaranteed weight of value by a competent authority. They had also intrinsic value and so commended a universal respect.

Metallic money consists of various kinds of coins. in AFGHANISTAN, coins of one, two and five afs. are the example of metallic money.

4. Credit Money

The next development in the payment system was the invention of check. With the development of modern banking, the payments for transactions are mostly received and made through checks. The use checks or credit money is that it has made it possible and easier to make transactions for large amounts. Another advantage of checks is that they are easier to transport for making payments. They are safe and provide receipts for various payments.

5. Electronic Banking Stage

With the development of computers and advanced communication technology. Paper work in payment system is being gradually reduced and electronic funds transfer system is taking place. The payments are now increasingly made through magnetic strip cards such as bank debit cards, credit cards, etc. The ultimate benefits being derived from electronic banking include reduced processing cost, reduced lead times for making payments and increased flexibility.

A Monetary Standard

A monetary standard is the mechanism designed to keep he money supply portable, durable, divisible, and limited in supply.

TYPES OF STANDARDS
1. Metallic standards A. Monometallic standards I. Gold Ii. Silver B. Bimetallic standards 2. Inconvertible or fiat standard

The Gold Standard

Advantages

Disadvantages

People feel more secure about their money Prevents the government from printing too much paper currency

Gold stock may not grow fast enough to accommodate growing economy People could all convert currency into gold, draining the Govt Price of gold can change

Characteristics of Modern Money

Modern money shares the same characteristics of early money It is portable, durable, and can be easily transferred Same applies to checks Modern money is divisible Has been a little instable, but proper management could fix this