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Learning Objectives
Review the functions of money
moneywhat gives it its value and ability to be used almost universally. Explain the transactions demand and asset demand for money. Examine the institutional structure of the financial system. Discuss the current role of the Central Bank.
money is money
Money is what money does
Unit of account
Assisting measurement of relative worth of various goods, services and resources A form in which to store wealth, due to its liquidity and convenience
Store of value
Money Defined: M3
Three components:
Currency (coins and notes) Current deposits in banks upon which
Currency
Token money
money supply
Current Deposits
Cheques enable the ownership of
exchange
Can be readily converted into currency
Non-Current Deposits
Highly liquid financial assets
Can be readily converted into currency
or current deposits
New technologies (such as
Broad Money
M3 plus borrowings from the private
sector of non-bank financial intermediaries (NBFIs) less holdings of currency and bank deposits by the NBFIs
Credit Cards
Not money
Simply a convenient method of
obtaining a short-term loan from the card-issuer Facilitate the synchronisation of receipts and expenditures, reducing the demand for cash
Monetary base
Composed of:
Currency held by the public Currency held by the banks Banks demand deposits with the
Central Bank.
Fiat money
Relative scarcity
policies
Effective monetary management
Transactions Demand
The demand for money as a medium
of exchange
Level depends on money GDP (not
interest rates!)
Money demand curve is vertical
Assets Demand
The demand for money as financial
demand are added horizontally Changes in interest rates lead to movement along the curve Anything that changes money GDP leads to a shift in the money demand curve
+
Rate of interest, i (per cent) 10 7.5 5 2.5
Asset Demand, Da
=
Rate of interest, i (per cent)
Dt
0 0 50 100 150 200 250 300 Amount of money demanded (billions of dollars)
Da
0 0 50 100 150 200 250 300 Amount of money demanded (billions of dollars)
Dm
0 50 100 150 200 250 300 Amount of money demanded (billions of dollars)
ie 5
2.5
Dm
0 50 100 150 200 250 300
Regulation of the payment system Membership of the board of the Regulation Authority Membership of the Council of Financial Regulators