CHAPTER 1: MONEY
MONEY AND BANKING – B.COM PART 1
DEFINITION

 Money has been defined differently by different economists.

1. Descriptive Definitions
2. Legal Definitions...
DEFINITIONS
(1) Descriptive definitions
 “Anything that is generally acceptable as a means of exchange and that at the sa...
DEFINITIONS
(2) Legal Definitions:
 “Anything which is defined by the state as money is money” – Professor Knap
 Profess...
DEFINITIONS
(3) General Acceptability Definitions:
 “Money is anything which is commonly used and generally accepted as a...
“MONEY IS ANYTHING THAT IS REGULARLY USED IN
ECONOMIC TRANSACTIONS AND SERVES AS A
MEDIUM OF EXCHANGE, A UNIT OF ACCOUNT A...
ORIGIN OF MONEY

Money has evolved through five different stages during history:

1. Commodity money
2. Metallic money
3. ...
ORIGINS OF MONEY

1. Commodity money:

 Commodity money has a value apart from its use of money.
 A large number of item...
ORIGINS OF MONEY

2. Metallic money:

 Coinage: gold and silver were used as coins, stamped by a competent authority.
 A...
ORIGINS OF MONEY

3. Paper Currency:

 Paper currency is made of paper and functions as a medium of exchange
 Initially ...
ORIGINS OF MONEY

4. Credit money or bank money:

 Bank money is the use of cheques as the medium of exchange.
 Cheques ...
ORIGINS OF MONEY

5. Electronic banking stage:

 This is a modern system of transferring funds using Electronic Communica...
FUNCTIONS OF MONEY

Primary Functions of Money

•
•
•
•

Money as a medium of Exchange
Money as a unit of account
Money as...
PRIMARY FUNCTIONS OF MONEY
1. Money as a medium of Exchange


Used to pay for goods and services



Overcame double coin...
SECONDARY FUNCTIONS OF MONEY
Money has the potential to influence an economy, by influencing interest rates, price levels,...
CONTINGENT FUNCTIONS OF MONEY

Contingent functions are derived from primary & secondary functions

 Distribution of nati...
QUALITIES OF A GOOD MONEY SYSTEM
The term monetary system refers to the type of standard money used for making payments. I...
INFLATION

 Inflation is a continuous upward movement in the general (average) level of prices.

 Two causes:
1. Demand ...
DEMAND PULL INFLATION
 When aggregate demand increases faster than aggregate supply of goods and services, prices will

i...
COST PUSH INFLATION
 Cost push inflation occurs when prices are forced upward by increases in the cost of factors of

pro...
REMEDIES OF INFLATION
1. Monetary Policy


It is a policy which influences the economy through changes in the money suppl...
REMEDIES OF INFLATION

3. Other measures
i.

Price support program

ii. Provision of subsidies
iii. Arrangements of easy a...
INFLATION & DEFLATION

Inflation
Deflation
DEFLATION

 Deflation refers to the situation where price level fall is causing major increase in

unemployment, reductio...
CAUSES OF DEFLATION

 When the level of money income falls relatively to the current supply of goods and services.
 Defl...
REFLATION

 A real Reflation is a sustained rise in the general level of prices.
 It is a situation all rising prices af...
REFLATION
Similarities between inflation and reflation:
 The money supply increases
 Upward movement of general price le...
DEVALUATION

 Devaluation is the a reducing of value or exchange rate of national currency with respect to other foreign
...
DEVALUATION

 Depreciation is the lowering of currency value in a free-floating exchange rate system.
 Devaluation is th...
VALUE OF MONEY

 Value of money refers to its purchasing power: that is its capacity to command goods in exchange for

it...
VALUE OF MONEY

1. Quantity theory of money
2. Cash balance theory of money

3. Modern quantity theory of money
QUANTITY THEORY OF MONEY

 In the 16th century,

gold and silver inflows from the Americas into Europe were being minted ...
TOTAL MONEY SUPPLY

SHIFT IN MONEY SUPPLY
QUANTITY THEORY OF MONEY

 Irving Fisher studied and derived an equation to demonstrate this effect, based on:
a) Supply ...
QUANTITY THEORY OF MONEY


QUANTITY THEORY OF MONEY

Assumptions:
 Full employment: The theory is based on the assumption of full employment in the ...
CASH BALANCE APPROACH
Fisher’s Transaction Theory

Cash Balance Approach

Based on medium of exchange function of money

B...
CASH BALANCE THEORY OF MONEY
Cambridge Equations:
 Alfred Marshall’s Equation:

M = K P y

 Keyne’s Equation:

n = P k

...
MODERN THEORY OF VALUE OF MONEY


VALUE OF MONEY

• Cambridge
Economists:
Keynes, Marsh
all
Quantity
Theory of
Money

• M=KPy
• n=Pk
Cash Balance
Approach t...
MONETARY POLICY

 Monetary policy is the process by which the monetary authority of a country controls the supply of

mon...
MONETARY POLICY

Objectives:
1. Promoting high employment
2. Achieve a steady economic growth
3. Stable price level as a g...
MONETARY POLICY

Expansion
• increases the total
supply of money rapidly
• combat unemployment in
a recession by
lowering ...
MONETARY POLICY
Quantitative controls

Qualitative controls

Open market operations

Varying margin requirements

Variatio...
KINDS OF PAPER MONEY
1. Representative paper money


This type of money is fully backed by metallic money



It possesse...
PAPER MONEY
Advantages

Disadvantages

Economical

Danger of inflation

Elasticity of money supply

Internal price instabi...
Upcoming SlideShare
Loading in …5
×

Money: Definition, Origin, Functions, Inflation, Deflation, Value of Money, Monetary and Fiscal Policy, Paper Money - B.com

6,562 views

Published on

These slides cover the first chapter of the B.Com "Banking and Finance" syllabus: Money.
It includes the following topics: Definition, Origin, Functions, Inflation and its remedies, , Deflation and its causes, reflation, devaluation, , Monetary and Fiscal Policy, Paper Money: its kinds and advantages and disadvanatges, Monetary system, Value of Money: quantity theory of money, cash balance approach, modern theory of money.

Published in: Economy & Finance, Business
2 Comments
13 Likes
Statistics
Notes
  • they are money management, market analysis, and entry/exit rules. to me money management is important in trading. i opened another account and start to trade profitably after i learnt from my past mistake. i don't trade emotionally anymore. Hey All! I enjoyed this video, it was fantastic,I earned from this tools, But I am getting more from GINO SHEARER TRADING although it was launched last month.
       Reply 
    Are you sure you want to  Yes  No
    Your message goes here
  • Binary options let users trade in currency pairs and stocks for various predetermined time-periods, minimal of which is 30 seconds. Hey All! I enjoyed this video, it was fantastic,I earned from this tools, But I am getting more from GEORGESEPROVITZ.COM although it was launched last month.
       Reply 
    Are you sure you want to  Yes  No
    Your message goes here
No Downloads
Views
Total views
6,562
On SlideShare
0
From Embeds
0
Number of Embeds
12
Actions
Shares
0
Downloads
366
Comments
2
Likes
13
Embeds 0
No embeds

No notes for slide
  • legal tender noun: money that the law allows people to use for paying debtsGeorg Friedrich Knapp (German: [knap]; March 7, 1842 – February 20, 1926) was a German economist who in 1895 published The State Theory of Money, which founded the chartalist school of monetary theory, which takes the statist stance that money must have no intrinsic value and strictly be used as governmentally-issued token, i.e., fiat money.Ppl still use mark over euro - deutsche mark?
  • Specialize in trade products becoz no more barter system.Money influences inc n cons in a coutry. All payments made in money. All striving for the same thing.4. employment.. Increases output. Distribution of wealth among ppl5. Achieve eco growth in a country. Rules set by govt.
  • Money distributes national incomes thru diff factors of productionBanks are creadted on credit of their cash reserves. Any change in volume is becoz of change in money supply.The term “marginal productivity” refers to the extra output gained by adding one unit of labor; all other inputs are held constant. So, the technology and efficiency of the factory stays the same. Marginal productivity is the extra jeans sewn, that is output gained, by hiring an extra worker, for example.
  • Does not mean that all prices increase. Some may stay constant or fall.. Average prices increase. Money is continuously losing value.
  • Higher biz investments due to higher profit expectations or fall in interest rates
  • They feed upon each other. Workers need money to adjust to increased prices level.Monopoly walay firms fix a higher profit margin. Smaller firms also then fix higher prices because of larger firmsIncrease in oil, gas, steel, chemicalsProducers throw burden of new taxes onto customersIf price of imported goods increase. Inflation.
  • Monetary policy– central bankFiscal policy – govt regulationsJohn Maynard KeynesTax down; inflation risesDeficit financing: When a government's expenditures exceed its revenues, causing or deepening a deficit. This excess spending needs to be financed through borrowing, likely from foreign governments. The increased government spending can help stimulate the economy as more money flows in, but the jump in borrowing can have an adverse effect by raising interest rates.
  • Devaluation: Stimulates exports and foreign investmentRestricts importsFavourable balance of paymentsStimulates domestic employment- increase in country income- employment
  • Devaluation happens in countries with a fixed exchange rate. In a fixed-rate economy, the government decides what its currency should be worth compared with that of other countries. The government pledges to buy and sell as much of its currency as needed to keep its exchange rate the same. The exchange rate can change only when the government decides to change it. If a government decides to make its currency less valuable, the change is called devaluation. Fixed exchange rates were popular before the Great Depression but have largely been abandoned for the more flexible floating rates. China was the last major economy to openly use a fixed exchange rate. It switched to a floating system in 2005.A floating exchange rate means that the global investment market determines the value of a country's currency. Pak since 1982The exchange rate among various currencies changes every day as investors reevaluate new information. While a country's government and central bank can try to influence its exchange rate relative to other currencies, in the end it is the free market that determines the exchange rate. As of 2012, all major economies use a floating exchange rate.
  • More supply, higher prices; more inflation. And less value of moneycausing inflation (the percentage rate at which the level of prices is rising in an economy). The consumer therefore pays twice as much for the same amount of the good or service.
  • Velocity= gnp/given stock of moneyAlso called velocity of circulationThey don’t demand money like we demand commodities
  • Developed by a group of Cambridge economists: Alred, Marshall, A.C. Pigou Robertson and J.M. KeynesStorage is for precautionary and transaction motives. Only happens when the national income grows and ppl wealth. Demand for goods decrease, prices decrease and value of monet increases.
  • i.e general acceptability, value, uniform quality, convenience and be economical.
  • Money: Definition, Origin, Functions, Inflation, Deflation, Value of Money, Monetary and Fiscal Policy, Paper Money - B.com

    1. 1. CHAPTER 1: MONEY MONEY AND BANKING – B.COM PART 1
    2. 2. DEFINITION  Money has been defined differently by different economists. 1. Descriptive Definitions 2. Legal Definitions 3. General Acceptability Definitions
    3. 3. DEFINITIONS (1) Descriptive definitions  “Anything that is generally acceptable as a means of exchange and that at the same time acts as a measure and store of value.” – Crowther in his book: An outline of money  “Money may be defined as a means of valuation and of payment” – Coulborn  “Money is anything that is widely used as a mean of payment and is generally acceptable in settlement of debts.” – Cole These are considered narrow and partial definitions, because they focus on the functions of money and not on what money is
    4. 4. DEFINITIONS (2) Legal Definitions:  “Anything which is defined by the state as money is money” – Professor Knap  Professor Hartley believes that money should be legal tender.  These are narrow definitions based on “state theory of money.”  The government can not force the people to accept money. e.g. German currency Mark
    5. 5. DEFINITIONS (3) General Acceptability Definitions:  “Money is anything which is commonly used and generally accepted as a medium of exchange or as a standard of value.” – Kents  Money is described as “anything which is widely accepted in payment of goods or in discharge of other kinds of business obligations,” by D.H. Robertson.  “Money is anything that is generally accepted in payment of goods and services or in the repayment of debts.” – E. Mishkin Money here, is defined as anything which has general acceptability.
    6. 6. “MONEY IS ANYTHING THAT IS REGULARLY USED IN ECONOMIC TRANSACTIONS AND SERVES AS A MEDIUM OF EXCHANGE, A UNIT OF ACCOUNT AND A STORE OF VALUE.” DEFINITION OF MONEY
    7. 7. ORIGIN OF MONEY Money has evolved through five different stages during history: 1. Commodity money 2. Metallic money 3. Paper money 4. Credit money 5. Electronic money
    8. 8. ORIGINS OF MONEY 1. Commodity money:  Commodity money has a value apart from its use of money.  A large number of items such as cows, goats, sheep, rice, grains, etc were used  However they lacked storage capability, durability transportability, divisibility, and homogeneity.
    9. 9. ORIGINS OF MONEY 2. Metallic money:  Coinage: gold and silver were used as coins, stamped by a competent authority.  As time passed, transportation and storage of coins became inconvenient and dangerous
    10. 10. ORIGINS OF MONEY 3. Paper Currency:  Paper currency is made of paper and functions as a medium of exchange  Initially paper currency carried a promise that it was convertible into a fixed quantity of precious metallic gold and silver  This promise was eliminated in 1914 in England and in 1933 in America.  Fiat money: this newspaper money which is considered legal tender because the government says it is money. It has no backing of gold, silver or government securities
    11. 11. ORIGINS OF MONEY 4. Credit money or bank money:  Bank money is the use of cheques as the medium of exchange.  Cheques have made it possible an easier to make transactions for large amounts. They are easier to transport.  They are safe and provide receipts  Checks are not legal tender. They cannot be enforced in payments of debts
    12. 12. ORIGINS OF MONEY 5. Electronic banking stage:  This is a modern system of transferring funds using Electronic Communications.  Payments are now made through magnetic strip cards such as bank debit cards, credit cards, telephone cards etc.  This form of banking has reduced processing costs, lead times for payments and increasing flexibility.  These are also not considered legal tender
    13. 13. FUNCTIONS OF MONEY Primary Functions of Money • • • • Money as a medium of Exchange Money as a unit of account Money as a standard of deferred payments Money as a store of value Secondary Functions of Money • • • • • Aid to specialization, production and trade Influence on income & consumption Money is an instrument of making loans Money as tool of monetary management Instrument of economic policy Contingent Functions of Money • • • • Distribution of national income Basis of credit system Measure of marginal productivity Liquidity of property
    14. 14. PRIMARY FUNCTIONS OF MONEY 1. Money as a medium of Exchange  Used to pay for goods and services  Overcame double coincidence of barter system  Introduced time efficiency of exchanging goods and services  Encouraged division of labour. People are now specializing due to easier payment of services rendered.. 2. Money as a unit of account  Common measure of money.  Used to compare goods in terms money 3. Money as a standard of deferred payments  Money is useful in the purchasing goods on credit as it is easy to borrow-and lend 4. Money as a store of value  Does not deteriorate and stores value
    15. 15. SECONDARY FUNCTIONS OF MONEY Money has the potential to influence an economy, by influencing interest rates, price levels, resources, etc. 1. Aid to specialization, production and trade 2. Influence on income & consumption 3. Money is an instrument of making loans 4. Money as tool of monetary management 5. Instrument of economic policy
    16. 16. CONTINGENT FUNCTIONS OF MONEY Contingent functions are derived from primary & secondary functions  Distribution of national income  Basis of credit system in banks  Measure of marginal productivity  Liquidity of property
    17. 17. QUALITIES OF A GOOD MONEY SYSTEM The term monetary system refers to the type of standard money used for making payments. It refers to the value of money, organization, arrangement, control and management system of money. 1. Simplicity 2. Elasticity 3. Economical 4. Price Stability 5. Legality 6. Liquidity 7. Full employment
    18. 18. INFLATION  Inflation is a continuous upward movement in the general (average) level of prices.  Two causes: 1. Demand Pull Inflation 2. Cost Push Inflation
    19. 19. DEMAND PULL INFLATION  When aggregate demand increases faster than aggregate supply of goods and services, prices will increase and inflation occurs.  Also called aggregate demand inflation.  Occurs when there is excess demand for output.  Sources of rise in demand pull inflation  Monetarist view: (Million Friedman)   If central bank issues and prints more money into the economy than its demand. Non monetary view: (J.M. Keynes)  Increase in purchases of goods and services due to increase in wealth.  Higher business investments  Increase in government expenditures  Foreign demand for country’s goods.
    20. 20. COST PUSH INFLATION  Cost push inflation occurs when prices are forced upward by increases in the cost of factors of production and not by excess demand.  Sources of increased costs are: 1. Increase in money wage rates 2. Profit push inflation 3. Material push inflation 4. Higher taxes 5. Rise in import prices
    21. 21. REMEDIES OF INFLATION 1. Monetary Policy  It is a policy which influences the economy through changes in the money supply and available credit. 2. Fiscal Policy 1. Change in taxation 2. Changes in government expenditure 3. Public borrowing 4. Balanced budget changes 5. Control of deficit financing
    22. 22. REMEDIES OF INFLATION 3. Other measures i. Price support program ii. Provision of subsidies iii. Arrangements of easy availability of goods on hire purchase to stimulate demand iv. Imposing direct control v. Rationing of essential consumer goods in case of acute emergency through holding of Friday and Sunday markets
    23. 23. INFLATION & DEFLATION Inflation Deflation
    24. 24. DEFLATION  Deflation refers to the situation where price level fall is causing major increase in unemployment, reduction in output and decrease in the income off the people.  “Deflation is that state of the economy where the value of money is rising or prices are falling.” -- Crowther
    25. 25. CAUSES OF DEFLATION  When the level of money income falls relatively to the current supply of goods and services.  Deflationary process may occur due to:  Fall in private investment  Persistent unfavorable balance of payments  Continued government-budgetary surplus  Sudden increase in the total output  By action of central bank to raise the discount rate or by selling securities  All are due to the combined effect of all of these factors
    26. 26. REFLATION  A real Reflation is a sustained rise in the general level of prices.  It is a situation all rising prices after the full employment is reached. This phenomenon is due to increased in aggregation demand without any increase in production of goods and employment.  The solution is the result of efforts made by the government to lift the economy out of depression.
    27. 27. REFLATION Similarities between inflation and reflation:  The money supply increases  Upward movement of general price level Differences between inflation and recreation:  Inflation causes a serious problem of rising prices without any increase in output and employment, whereas reflation leads to more production and employment.  Reflation is adopted by the government.  It takes place below the level for employment  Prices rise very slowly under reflation, but very rapidly under inflation.
    28. 28. DEVALUATION  Devaluation is the a reducing of value or exchange rate of national currency with respect to other foreign currencies.  Under the fixed exchange rate system, the exchange rate is determined by the demand for and supply of foreign exchange.
    29. 29. DEVALUATION  Depreciation is the lowering of currency value in a free-floating exchange rate system.  Devaluation is the lowering of currency value in a fixed exchange rate system.
    30. 30. VALUE OF MONEY  Value of money refers to its purchasing power: that is its capacity to command goods in exchange for itself.  Value of money is high if it buys more commodities. And vice versa.  The value of money varies inversely with the general level of prices.
    31. 31. VALUE OF MONEY 1. Quantity theory of money 2. Cash balance theory of money 3. Modern quantity theory of money
    32. 32. QUANTITY THEORY OF MONEY  In the 16th century, gold and silver inflows from the Americas into Europe were being minted into coins, because of which there was a resulting rise in inflation.  Changes in money supply will directly impact both prices and inflation rates.  The quantity theory of money states that there is a direct relationship between the quantity of money in an economy and the level of prices of goods and services sold.  According to QTM, if the amount of money in an economy doubles, price levels also double and value of money is halved.
    33. 33. TOTAL MONEY SUPPLY SHIFT IN MONEY SUPPLY
    34. 34. QUANTITY THEORY OF MONEY  Irving Fisher studied and derived an equation to demonstrate this effect, based on: a) Supply of money • Total volume of money in circulation during a time period = MV • M: quantity of money in circulation • V: Velocity of money in circulation b) Demand of money a) People demand money for the means of exchange.
    35. 35. QUANTITY THEORY OF MONEY 
    36. 36. QUANTITY THEORY OF MONEY Assumptions:  Full employment: The theory is based on the assumption of full employment in the economy.  T and V are constant: The theory assumes that volume of trade (T) in the short run remains constant. So is the case with velocity of money (V) which remains unaffected.  Constant relation between M and M1. Fisher assumes constant relation between currency money M and credit money (M1).  Price level (P) is a passive factor. The price level (P) is inactive or passive in the equation. P is affected by other factors in equation i.e., T, M, M1, V and V1 but it does not affect them.
    37. 37. CASH BALANCE APPROACH Fisher’s Transaction Theory Cash Balance Approach Based on medium of exchange function of money Based on store function of money. Demand for money Demand for cash balances Focuses on demand/supply over period of time Focuses on demand/supply at particular point of time. Demand for money increases; Price level increases Demand for money increases; Price level decreases because of decrease in expenditures
    38. 38. CASH BALANCE THEORY OF MONEY Cambridge Equations:  Alfred Marshall’s Equation: M = K P y  Keyne’s Equation: n = P k M : quantity of money P : price level y: aggregate real income K : fraction of real income which people wish to hold in money form P : price level of consumption goods n : total supply of money in circulation K : total quantity of consumption units which people wish to hold in cash
    39. 39. MODERN THEORY OF VALUE OF MONEY 
    40. 40. VALUE OF MONEY • Cambridge Economists: Keynes, Marsh all Quantity Theory of Money • M=KPy • n=Pk Cash Balance Approach to Money Modern Theory of value of money
    41. 41. MONETARY POLICY  Monetary policy is the process by which the monetary authority of a country controls the supply of money, often targeting a rate of interest for the purpose of promoting economic growth and stability  The official goals usually include relatively stable prices and low unemployment.
    42. 42. MONETARY POLICY Objectives: 1. Promoting high employment 2. Achieve a steady economic growth 3. Stable price level as a goal 4. Stability in interest rate 5. Promoting a more stable financial market 6. Stability in the foreign exchange markets
    43. 43. MONETARY POLICY Expansion • increases the total supply of money rapidly • combat unemployment in a recession by lowering interest rates Contraction • expands the money supply more slowly than usual or even shrinks it • slows inflation to avoid the resulting distortions and deterioration of asset values.
    44. 44. MONETARY POLICY Quantitative controls Qualitative controls Open market operations Varying margin requirements Variation in the bank rates Consumer’s credit regulation Credit rationing Use of moral persuasion Varying reserve requirements Direct action
    45. 45. KINDS OF PAPER MONEY 1. Representative paper money  This type of money is fully backed by metallic money  It possesses all the fundamentals qualities of a good money system 2. Convertible paper money  It is money which Carries a promise by the issuer that the paper can be converted into the standard money metal at some future date.  In actual practice, the state bank never keeps a 100% metallic result. It is always less than 100%.  State bank of Pakistan does not issue this kind of money 3. Inconvertible paper money  This money cannot be converted into standard money metal  It is regulated by the law of state, and is also called Fiat money
    46. 46. PAPER MONEY Advantages Disadvantages Economical Danger of inflation Elasticity of money supply Internal price instability Promotes economic growth Exchange instability Internal price stability Dangerous of mismanagement Helpful in emergency Fear of demonetization Regulation of exchange rates Use within the country Uniform quality

    ×