This document provides an overview of key concepts related to the monetary system, including: - Money serves three main functions: as a medium of exchange, a unit of account, and a store of value. - Money can take the form of commodity money, backed by intrinsic value like gold, or fiat money, which derives value by government decree. - Central banks like SAMA regulate a country's money supply and banking system through monetary policy tools. - Commercial banks engage in fractional-reserve banking, lending out deposits and expanding the money supply using the money multiplier effect. This can create the risk of bank runs if confidence is lost in the system.

1. Chapter 30
The Monetary System

2. Key Terms
money
medium of exchange
unit of account
store of value
liquidity
commodity money
fiat money
currency
demand deposits
central bank
money supply
monetary policy
reserves
fractional-reserve banking
reserve ratio
money multiplier
bank capital
leverage
leverage ratio
capital requirement
open-market operations
discount rate
reserve requirements

3. Two Choices
Make
or
Trade

4. Barter
Direct trade - stuff for stuff
No money
Double coincidence of
wants

5. Both sides have to want what the other side has
Double coincidence of wants

6. Both must want what
the other has at the
same time
Double coincidence of
wants

7. Money makes trade easier

8. What is money?

9. Money
Something people use to
trade with

13. Why would you accept a
cigarette if you didn’t smoke?

15. Functions of Money
Medium of exchange
Unit of account
Store of value

16. Medium of Exchange
Buyers give to sellers
Sellers accept from buyers

17. Unit of Account
Measurement
Prices
Debts

18. Store ofValue
Trading time for time
Today for tomorrow
Tomorrow for today
Earn - Save - Spend

19. Liquidity
How easy is it to convert
something to money

20. Kinds of Money
Commodity
Fiat

21. Commodity Money
Intrinsic value

22. Easy to carry
Easy to measure
Easy to verify
Hard to copy

23. =
Gold Standard
Central Bank will convert paper
money to gold at a fixed rate

24. Fiat Money
No intrinsic value
Declared money by
government decree

25. Fiat Money
Why do people accept fiat
money?
Trust that someone else
will also accept it

26. Money
Trust inscribed
If people lose trust,
money loses it value

27. Coins
Currency
Checks

28. Card Type Payment
Credit Defer
Debit Instant

29. Why credit and debit
cards are not money
Not a method of
payment, but a method of
making payment

30. Debit card is like a check
Takes money out of your
bank account

31. Credit Card
Defer the payment

32. Demand Deposits
Bank account that you
can access by writing a
check or using a debit
card

34. Saudi Arabia Monetary
Agency
The Central Bank of
Saudi Arabia
SAMA
sama.gov.sa

35. Central Bank
The bank that oversees
the banking system and
regulates the money
supply in a country

36. Dr. Fahad Al Mubarak
Chairman of the Board
Governor
Saudi Arabia Monetary
Agency
SAMA

38. Six Functions
• Issues national currency, the Saudi Riyal.
• Acts as a banker to the government.
• Supervises commercial banks.
• Manages Kingdom’s foreign exchange reserves.
• Conducts monetary policy for promoting
price and exchange rate stability.
• Promotes the growth and ensures the
soundness of the financial system.

40. Source: sama.gov.sa

41. Money Supply
The quantity of money
available in a country.

42. Monetary Policy
Setting the money
supply by the central
bank policymakers

43. Two Types of Banks
100 Percent Reserve
Fractional Reserve

44. 100-Percent Reserve Bank
All the deposits are kept
in a safe vault.
No loans

46. Fractional-Reserve Bank
Bank only holds a
fraction of the deposits
as reserves
Loans out the remainder

47. Reserve Ratio
The fraction of deposits
that banks hold as
reserves

48. Fractional-Reserve Banking
Creates money

49. Bank Deposit
Reserve
10%
Loan
Remainder
1000 100 900
900 90 810
810 81 729
• • • •
• • • •
• • • •
Total 10,000
How does 1000 become 10,000?

50. Reserve
Ratio
Fraction Reciprocal
Money
Multiplier
100% 1 1÷1 1
50% 0.5 1 ÷ 0.50 2
25% 0.25 1 ÷ 0.25 4
10% 0.1 1 ÷ 0.10 10
5% 0.05 1 ÷ 0.05 20
1% 0.01 1 ÷ 0.01 100
Money multiplier is the
reciprocal of the reserve ratio

51. Reserve Ratio
Not changed very often
What is the current reserve
ratio in Saudi Arabia? 7%
What is the Money Multiplier?
1÷7% = 14.28

52. Bank Deposit Insurance
Protects against bank runs
Moral Hazard to take more
risk because government
will pick up losses

54. Bank Run
Customers all want their
money at the same time
Many banks runs at once
Bank Panic

62. Zimbabwe, Nov. 2008 Highest monthly inflation: 79,600,000,000%
Prices doubled every: 24.7 hours