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MONEY & BANKING
1
LESSON OBJECTIVES
At the end of the lesson, students should be able to:
Explain deflation
Identify the primary causes and effects deflation
2
DEFLATION
Economic depression leading to low demand thus
persistent fall in general price levels.
3
CAUSES OF DEFLATION
Surplus budgeting – less government spending after
taken much from the public thus low money in
circulation.
4
CAUSES OF DEFLATION
Decrease in wages & salaries – less money in
circulation thus low purchasing power.
5
CAUSES OF DEFLATION
Excess supply – without corresponding demand
levels leads to deflation.
6
CAUSES OF DEFLATION
Deficient demand – low income leads to low
purchasing authority.
7
EFFECTS OF DEFLATION
Depression – low investments leading to decline in
economic activities.
8
EFFECTS OF DEFLATION
Unemployment – fewer development projects leads
to less employment of factors of production
9
MONEY MARKET
Short term loans and investments market for
individuals and institutions.
10
CAPITAL MARKET
Long term loans and investments market for
individuals and institution.
11
BANKING
It is the practice of accepting deposits in the form of
money and valuables from the general public for safe
keeping, giving out on demand and granting of
credits.
12
BANK
It is a business organization charges with the
responsibility of dealing in money & credits and
thereby earning profits for its shareholders.
13
MONEY & BANKING
LESSON 2
14
LESSON OBJECTIVES
At the end of the lesson, students should be able to:
Describe types and functions of the central bank.
15
TYPES OF BANKS
Central (National) Bank – A statutory financial
institution of a country in charge of management and
control of the financial system of that country.
16
TYPES OF BANKS
Commercial Bank - A financial institution whose
business is to collect funds and valuables from the
public for safe keeping and thereby making profit for
its shareholders.
17
TYPES OF BANKS
Merchant Banks (Acceptance House) – A financial
institutions with specialized functions including
acceptance of bill of exchange, issuance of new
shares, among others.
18
TYPES OF BANKS
Development Banks – A financial institution
established for the purposes of providing long term
finance for the development of a particular sector of
the economy.
19
TYPES OF BANKS
Rural Banks – Rural established financial institution
charged with resource mobilization in the rural areas
for productive use.
20
FUNCTIONS OF CENTRAL BANK
Banker to the government – Keep government
accounts by making payments as well as receiving
income on behalf of the government.
21
FUNCTIONS OF CENTRAL BANK
Banker to the banks – Keeps the account of
commercial banks by receiving income, making
payments as well as a clearing house on their behalf.
22
FUNCTIONS OF CENTRAL BANK
Issues & withdraws currency notes – It’s the only
bank with the responsibility of issuing a nation’s
currency and withdrawing worn out currency.
23
FUNCTIONS OF CENTRAL BANK
Lender of last resort – It stands ready at all time to
lend to any recognized financial institution when they
are out of cash.
24
FUNCTIONS OF CENTRAL BANK
Controller & Regulator of Money Supply – It
controls and monitors the activities of commercial
banks in order to regulates money supply in the
economy.
25
FUNCTIONS OF CENTRAL BANK
Transacts international business on Government’s
behalf – It does external business (import & export
trade, loans, investments & debts settlement) for
government.
26
MONEY & BANKING
LESSON 2
27
LESSON OBJECTIVES
At the end of the lesson, students should be able to:
Explain monetary policies.
28
MONETARY POLICIES
 Policies used by the Central Bank that deal with the
manipulation (increase or decrease) of money supply to
achieve a particular economic goal.
29
TOOLS / INSTRUMENTS USED BY CENTRAL
BANKS TO CONTROL MONEY SUPPLY
Bank Rate – Rate of interest charged by Central
Banks on loans to the Commercial Banks thereby
influencing their interest rate to their customers or
institution. High rates reduces money in circulation
and low rates increase money in circulation.
30
TOOLS / INSTRUMENTS USED BY CENTRAL
BANKS TO CONTROL MONEY SUPPLY
Open Market Operation – It is sale of securities by
Central Bank to reduce money in circulation or
purchase back of these securities to increase money
in circulation.
31
TOOLS / INSTRUMENTS USED BY CENTRAL
BANKS TO CONTROL MONEY SUPPLY
Cash Ratio – It is the expected minimum percentage
of Commercial bank’s deposit to be kept with the
Central Bank. To reduce money supply in the
economy, high cash ratio is demanded and vice
versa.
32
TOOLS / INSTRUMENTS USED BY CENTRAL
BANKS TO CONTROL MONEY SUPPLY
Special Deposit – Legally obliged deposit by the
Commercial Banks to the Central Banks aside their
cash ratio. To increase money in circulation, less
special deposit will be required and vice versa.
33
TOOLS / INSTRUMENTS USED BY CENTRAL
BANKS TO CONTROL MONEY SUPPLY
Directives –They are instructions from Central Banks
to Commercial Banks on where (sector) and the
percentage (amount) of loans and advances to be
granted.
34
TOOLS / INSTRUMENTS USED BY CENTRAL
BANKS TO CONTROL MONEY SUPPLY
Moral Suasion – An appeal by the Central Bank to
the various Commercial Banks to increase or reduce
money in circulation (money supply) through their
credit creation.
35

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Week 8: Demystifying Money and Banking: A Guide to Financial Systems

  • 2. LESSON OBJECTIVES At the end of the lesson, students should be able to: Explain deflation Identify the primary causes and effects deflation 2
  • 3. DEFLATION Economic depression leading to low demand thus persistent fall in general price levels. 3
  • 4. CAUSES OF DEFLATION Surplus budgeting – less government spending after taken much from the public thus low money in circulation. 4
  • 5. CAUSES OF DEFLATION Decrease in wages & salaries – less money in circulation thus low purchasing power. 5
  • 6. CAUSES OF DEFLATION Excess supply – without corresponding demand levels leads to deflation. 6
  • 7. CAUSES OF DEFLATION Deficient demand – low income leads to low purchasing authority. 7
  • 8. EFFECTS OF DEFLATION Depression – low investments leading to decline in economic activities. 8
  • 9. EFFECTS OF DEFLATION Unemployment – fewer development projects leads to less employment of factors of production 9
  • 10. MONEY MARKET Short term loans and investments market for individuals and institutions. 10
  • 11. CAPITAL MARKET Long term loans and investments market for individuals and institution. 11
  • 12. BANKING It is the practice of accepting deposits in the form of money and valuables from the general public for safe keeping, giving out on demand and granting of credits. 12
  • 13. BANK It is a business organization charges with the responsibility of dealing in money & credits and thereby earning profits for its shareholders. 13
  • 15. LESSON OBJECTIVES At the end of the lesson, students should be able to: Describe types and functions of the central bank. 15
  • 16. TYPES OF BANKS Central (National) Bank – A statutory financial institution of a country in charge of management and control of the financial system of that country. 16
  • 17. TYPES OF BANKS Commercial Bank - A financial institution whose business is to collect funds and valuables from the public for safe keeping and thereby making profit for its shareholders. 17
  • 18. TYPES OF BANKS Merchant Banks (Acceptance House) – A financial institutions with specialized functions including acceptance of bill of exchange, issuance of new shares, among others. 18
  • 19. TYPES OF BANKS Development Banks – A financial institution established for the purposes of providing long term finance for the development of a particular sector of the economy. 19
  • 20. TYPES OF BANKS Rural Banks – Rural established financial institution charged with resource mobilization in the rural areas for productive use. 20
  • 21. FUNCTIONS OF CENTRAL BANK Banker to the government – Keep government accounts by making payments as well as receiving income on behalf of the government. 21
  • 22. FUNCTIONS OF CENTRAL BANK Banker to the banks – Keeps the account of commercial banks by receiving income, making payments as well as a clearing house on their behalf. 22
  • 23. FUNCTIONS OF CENTRAL BANK Issues & withdraws currency notes – It’s the only bank with the responsibility of issuing a nation’s currency and withdrawing worn out currency. 23
  • 24. FUNCTIONS OF CENTRAL BANK Lender of last resort – It stands ready at all time to lend to any recognized financial institution when they are out of cash. 24
  • 25. FUNCTIONS OF CENTRAL BANK Controller & Regulator of Money Supply – It controls and monitors the activities of commercial banks in order to regulates money supply in the economy. 25
  • 26. FUNCTIONS OF CENTRAL BANK Transacts international business on Government’s behalf – It does external business (import & export trade, loans, investments & debts settlement) for government. 26
  • 28. LESSON OBJECTIVES At the end of the lesson, students should be able to: Explain monetary policies. 28
  • 29. MONETARY POLICIES  Policies used by the Central Bank that deal with the manipulation (increase or decrease) of money supply to achieve a particular economic goal. 29
  • 30. TOOLS / INSTRUMENTS USED BY CENTRAL BANKS TO CONTROL MONEY SUPPLY Bank Rate – Rate of interest charged by Central Banks on loans to the Commercial Banks thereby influencing their interest rate to their customers or institution. High rates reduces money in circulation and low rates increase money in circulation. 30
  • 31. TOOLS / INSTRUMENTS USED BY CENTRAL BANKS TO CONTROL MONEY SUPPLY Open Market Operation – It is sale of securities by Central Bank to reduce money in circulation or purchase back of these securities to increase money in circulation. 31
  • 32. TOOLS / INSTRUMENTS USED BY CENTRAL BANKS TO CONTROL MONEY SUPPLY Cash Ratio – It is the expected minimum percentage of Commercial bank’s deposit to be kept with the Central Bank. To reduce money supply in the economy, high cash ratio is demanded and vice versa. 32
  • 33. TOOLS / INSTRUMENTS USED BY CENTRAL BANKS TO CONTROL MONEY SUPPLY Special Deposit – Legally obliged deposit by the Commercial Banks to the Central Banks aside their cash ratio. To increase money in circulation, less special deposit will be required and vice versa. 33
  • 34. TOOLS / INSTRUMENTS USED BY CENTRAL BANKS TO CONTROL MONEY SUPPLY Directives –They are instructions from Central Banks to Commercial Banks on where (sector) and the percentage (amount) of loans and advances to be granted. 34
  • 35. TOOLS / INSTRUMENTS USED BY CENTRAL BANKS TO CONTROL MONEY SUPPLY Moral Suasion – An appeal by the Central Bank to the various Commercial Banks to increase or reduce money in circulation (money supply) through their credit creation. 35