1 Money

MONEY AND
BANKING
THE BEGINNING OF MONEY
& BANKIN
G
BARTER
ECONOMY
Exchange of surplus between parties
could be referred to as Barter System
in simple.
BARTER
ECONOMY
• Barter can be taken place in 3
forms;
• Goods to Goods
• Goods to Services
• Services to Services
• Shortcomings of Barter System
• Double co-incidence of wants.
• Difficult to store
• Indivisible
• Portability problems
The solution taken by people to overcome the lapses
faced in Barter System
they
is
Money
MONE
Y
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Economists define it as something that serves as a medium

of
exchange, a unit of accounting, and a store of value.
QUALITIES OF
MONEY
• General acceptability
• Durability
• Portability
• Divisibility
• Limited in supply
• Stability
• Homogeneous or
Identical
TYPES OF
MONEY
• Cash/currency/legal tender
• Money in current account/bank
money
• Money substitutes
• E-cash
• Digi-cash
• E-wallet/electronic cash purse
• Quasi money
• Token money
• Black money
Functions
of
Money
Primary Secondar
y
Medium of
Store of
exchange value
Standard of
Measure of
differed payment
value
FUNCTIONS OF
MONEY
• As a medium of exchange.
( Primary Function)
• This facilitates trade.

• It removes the problem of double coincidence of
wants.
• It facilitates modern production aspects like
division of labor, specialization etc.
FUNCTIONS OF
MONEY
• As a unit of account/ measure of
value.
( Primary Function )
• Money acts as a measure of value and it can be
used to compare
the value of goods and services and factor rewards.
• Facilitates efficient allocation of limited resources.
• It helps to measure the price level and changes of
them
• Facilitates accounting/ calculations
• Helps to set prices for products
FUNCTIONS OF
• As a store of value.MONEY
( Secondary Function )
• This means holding wealth in the form of money for
future transaction and investment purposes. Thus
money links present and future through this
function.
• Promotes savings
• Investments increases
• Production gets expanded due to increase in
investments
• Accelerates economic growth due to increase in
production
• In times of inflation this function of money is
distorted.
• An opportunity cost is involved here
FUNCTIONS OF
MONEY
• As a standard for differed payment. (Secondary Function)
• Money enables people to borrow and lend

agreed amounts.
• Easier and convenient way of measuring debt
and repaying debt
• This function links present and future
• Facilitates the growth of trade
• Stimulates the growth of money market
Value of Money
Official value Real value
Internal value
External value
VALUE OF
MONEY
Official value/face value
This is the value indicated on the face of

notes and coins. This is imputed by the
government.
VALUE OF
MONEY
Real value/ purchasing power- This is the amount of
goods and services that can be bought within the
given amount of money or per unit of money. The real
value highly depends on the general price level of
goods and services
Internal/domestic value- This is the quantity of goods and services
that can be bought with the particular unit of currency within a
country. This depends on the general price levels in a country. i.e.
when the domestic price levels falls, internal value of money rises
External/foreign value- This is the rate at which one currency is
exchanged to another. In other words it is the exchange rate between
countries.
LIQUIDIT
Y
“ Liquidity refers to the ease in which an asset can
be converted into cash without delay at little or no
cost.”
Liquidity describes the degree to which

an asset or security can be quickly bought or sold in
the market without affecting the asset's price.
LIQUIDIT
• Assets according to the range of
Y
liquidity
• Cash
• Demand deposits
• Time and savings deposits
• Money substitutes
• Financial and physical assets
• Reasons why people keep wealth in the form of
money rather than other forms
• Money is perfect liquid
• It is easy to store and portable
• Uncertainty in the market value of no monetary assets
DEMAND FOR
MONEY
DEMAND FOR
MONEY
John Maynard Keynes distinguished three
different reasons for people to hold money
instead of alternative assets.
• Transaction demand for money (MDT)

• Precautionary demand for money (MDP)
• Speculative demand for money (MDS)
DEMAND FOR
MONEY
Transaction demand for money (MDT)
The amount of money that people want to keep
meet
to their regular or day to day transactions
be simply known as transaction demand for
could
money. The major determinant of MDT is income.
• Factors determining MDT
• Income- positively
• Time interval of the receipt of income-
positively
• General price levels in the economy- negatively
• Financial innovations / substitutes- negatively
DEMAND FOR
Precautionary demandMONEY
for money (MDP)
The amount of money people want to hold to meet
their unforeseen or unplanned emergencies relating to
interval
time of receipts of income and payments. E.
Sicknesses,
g. accidents.
The major determinant of MDP is
income
• Factors determining MDP
• Income- positively
• Time interval of the income receipt- positively
• General price levels in the economy-positively
• Nature of the unexpected emergency-
negatively
DEMAND FOR
MONEY
Demand for active money balance (MDTP)
This is the sum of transaction demand for money
and precautionary demand for money. The major
determinant of active money balance is income.
DEMAND FOR
MONEY
Speculative demand for money (MDS)
It refers to the amount of money people want to hold in order
to buy financial assets such as shares, bonds with the view of
earning income like dividends, interest etc. The major
determinant of MDS is the interest rate.
Interest is the cost of holding money. Thus higher the rate of

interest the greater will be the cost of holding money.
• Relationship between interest rates and price of bonds
• There is an inverse relationship between interest rate

and price of bonds. If interest rates rises the price of
bonds will fall and vice versa.
• If the interest rate is low at present, price of bonds will

be high now. People will expect the future interest
rate to rise and price of bonds to fall in future. Thus,
in order to buy bonds at lower prices in future, people
will hold more money with them.
SUPPLY OF
MONEY
SUPPLY FOR
MONEY
“Money supply is the amount of currency in circulation at a
given time.”
In other words it is the stock of liquid assets held by general

public of an economy.
The operating target of money supply is reserve money

whereas the intermediate target is broad money. The final
target is meant to be the price stability of the economy.
CLASSIFICATION
OF MONEY
SUPPLY
Reserve money/high powered money/base
money
These are sight liabilities of central bank and are

created and injected to the economy by CBSL
and serve as the operating target of monetary
policy.
The base money provides the basis for the
country’s money supply

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MONEY AND

Economists deﬁne it as something that serves as a medium

• This facilitates trade.

• Money enables people to borrow and lend

Oﬃcial value Real value

This is the value indicated on the face of

Liquidity describes the degree to which

• Transaction demand for money (MDT)

Interest is the cost of holding money. Thus higher the rate of

• There is an inverse relationship between interest rate

• If the interest rate is low at present, price of bonds will

In other words it is the stock of liquid assets held by general

The operating target of money supply is reserve money

These are sight liabilities of central bank and are

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