Money

Money is anything universally accepted and valued within a given society for payments of goods and
services and means of deferred payment. You talk about barter system

Historical development
Problems of barter system
Determination of exchange rate
Double coincidence of wants
Prevention of deferred payment and savings

You talk about how finding solution to the problems gave way to cowries, seashells, tubers
(commodity money). You talk about the 17th century goldsmiths. You talk about coins. You talk about
recent money

Properties
Value
Economy
Divisibility
Durability
Homogenity
Acceptability
Recognisiblility
Portability
Scarcity
Stability
Storability

Functions
Medium of exchange
Standard of deferred payments
Store of value
Measurement of value
Transfer of value
Dynamic instrument on the economy

Motives
Transactionary
Precautionary
Speculative

Supply of money: It is the total stock of money in an economy within a given time. It has to do with
currency and deposits. It is determined by banks. You talk about nominal money supply and real
money supply

Quantity theory of money:

A leading propounder of this theory is IRVING FISHER. It states that if supply of money is more
than money demanded, the surplus would be spent on current goods thereby increasing price level. On
the other hand, if money demanded is more than the supply of money, cash balances would be built up
by reducing expenditure, thereby reducing price level.
Disequilibrum between money demand and supply would cause changes in aggregate demand. The
value of money is determined not only by the supply of money but also the rate at which money
circulates and the quantity of goods available to back up the money (MV = PT). Where
M = the quantity of money in circulation
V = transactions velocity of circulation
P = Average price
T = the total number of transactions.

It tries to correct the impression that increase in prices are a result of the producer's profiteering

Criticisms
It is already a fact
It excludes the rate of interest

Demand for money: It refers to the total stock of money which all individuals in an economy, for
various reasons,wish to hold. Money is a stock and not a flow. We do not have to include a period of
time when defining it. People demand money not for itself, since they cannot consume it directly. They
demand for it because of what they wish to get with it

Theory of interest rate determination:

Charging of interest has not always been an acceptable practice. Usury is specifically condemned in
both the bible and sharia law. However in modern times, some have argued that the interest rate is
different from usury. They say the latter are rates they are unwilling to pay. Others say they differ from
interest rates due to the purpose for which they are borrowed, that is, for current consumption rather
than investment. Savers make decisions between consumption now and consumption in the future. It is
assumed that people would prefer to consume in the present, cetares paribus. Thus to persuade them to
save and provide funds for investment, they must be paid interest.

Classical theory of interest rates: It states that the interest rate is the factor which brings the demand for
savings and the demand for investment together. It believes that additional savings would bring down
interest rates and additional investment would increase interest rates. Thus it believes the determination
of interest rates is a self regulatory phenomenon that doesn't neccessarily need any form of intervention
by government. According to this theory, interest rate is determined by real forces such as thriftiness,
waiting, and productivity of capital.

Criticisms
It believes savings and investment are always equal
No correlation between the level of income and interest rate
It assumes that if the demand for or supply of capital curve, or both shifts, there will be a new
equilibrum: This is a nonsense theory in the sense that it assumes income as constant which is in
conflict with the fact that these two curves can shift independently which means that income varies.

The loanable funds theory: A neoclassical theory, a major propounder is KNUT WICKSELL, it is a
theory of real interest rates ie rates of return expressed in terms of purchasing power. Thus, real
interest rate is determined by savings, investment, and loanable funds which consist of funds derived
from other sources as well. It depends on the availabilty of loan amounts such as the savings out of
disposable income. According to this theory, interest rate is not only determined by real forces such as
thriftiness, waiting, and productivity of capital, it also depends on monetary forces such as hoarding
and dishoarding of money, and money creation. It is a partly monetary policy.

A major criticism of the theory is that people bargain about nominal values rather than real values.

The liquidity preference theory: A major propounder of this theory is J. M. KEYNES. According to
Keynes, "interest is the reward for parting with liquidity for a specified period of time. It states that
interest rates change to equate the demand for money with the supply of money. If people prefer to
hold cash than to securities, interest rates will rise and if the demand for money reduces, interest rates
will fall. Also, if the supply of money rises, interest rates will fall, and if the supply of money falls,
interest rates will rise. It is a fully monetary theory .It does not believe in long run equilibrum as one
cannot be truly certain of the future.

Portfolio Selection Theory: Propounded by PROFESSOR JAMES TOBIN, it focuses on the choices
made by both firms and households between a wide range of physical or financial assets, each
generating varying returns (i.e having different prices). These choices can in turn be affected by all
kinds of financial or other event. A real economy, in other words, is a "spider’s web" of complex
interconnections, where interest rate levels and their effects cannot be predicted from any simple theory
of long-run equilibrium.

Central bank: It is usually a government owned bank which helps to control and supervise the entire
monetary and financial system of a country. The word "usually" is used in defining a central bank
because not all central banks are owned by the government. You illustrate with the USA where central
banks are jointly owned by the commercial banks in the areas where the central bank is established.
You also illustrate with Japan is ownes jointly by government owning 51% shares and private
institutions owning 49%. England's central bank which is one of the oldest started in 1694 as a private
institution. Similarly Bank of France and Bank of Italy, as well as other central banks in europe began
as private institutions. This was caused by the end of the second world war in 1945 where socialist
government came into power. In developing countries it was owned by government from the start. It
carries out the major finanancial operations of the government.

Features
Apex institution
Only one in a country
Usually owned by the government
Established by an act of parliament
Not profit oriented
Transancts with other banks
Member of money market

Functions
Issuance of currency
Goverment's banker
Financial institution's banker
Lender of last resort
Foreign transactions
Transaction in securities
Money creation
Data bank
Stabilization of rates
Agent of socio-economic development

Controls: it is divided into quantitative and qualitative controls

Open market operation
Bank or discount rate
Cash ratio
Liquidity ratio
Funding: converting short term loans to long term loans.
Physical controls: Giving special directives as to what lending policy to follow.
Moral suasion

Commercial banks: It is a joined stock company engaged in the banking business to receive all kinds of
deposits and to make loans of generally short term nature

Features
Limited liability
Incorporation
Profit orientation
Usually owned by private individuals
Member of money market

Functions
Advisors to customers
Accepting deposits
Provision of loans
Agents of payment
Foreign transactions
Transactions in securities
Money creation
Agents of socio-economic development

Types of accounts:
Savings account: It has to do with low income earners, minimum initial deposit, passbook. Only
customer can withdraw with notice, others can save on his behalf. Frequent deposits encouraged,
Frequent withdrawals are discouraged. There is no overdraft facility

Current account: It has to do with high income earners and firms. No notice, discouragement recent and
interest but commission frequent withdrawals discouraged before. Use of cheques. Frequent deposits
encouraged.

Fixed or time deposit account: It has to do with rich investors. Minimum inital deposit is large. It must
be left for a period of time in which no withdrawal is to be made. Interest rate is high

Special account: It has to do with a defined purpose, fixed time and interest

Development banks: They develop the economy. They give medium and long term loans. You talk
about low profits and high risk, industry and agriculture
Functions
Equity participation and supervision
Economic survey
Policy recommendation
Attractive medium and long term loans

Merchant banks (Investment banks): They accept and give large money. They are called acceptance
and issuing houses when dealing with bills of exchange

Savings bank: Low interest rate and no current account

Community bank

Money market: Short term

Institutions:
Central bank
Commercial banks
Acceptance houses: It accepts bills of exchange
Discount houses: It buys, sells, discounts and/or negotiates bills of exchange
Hire-purchase companies: It leases goods and services through installmental payments and grants full
ownership on full payment

Commodities
Bills of exchange: The drawer, who is A, who sends a written order to the drawee, who is B, to pay
money to the payee, who is C on demand or at a future fixed date..
Treasury bill: 3 months
Treasury certificate: 12 months

Capital market: medium and long term loans

Institutions
Insurance companies
Merchant banks
Development banks
Stock exchange
-Brokers
-Jobbers

Commodities
Shares: the division of capital
Debentures: loan certificates of a long term nature that are unsecured because of its creditworthiness.
Bonds: the bond itself is a written promise to pay a debt along with periodic payments of interest.

Importance of liquidity
To be able to loan to customers
To cover inter-bank indebtedness
To be prepared for interruptions in normal cash flow
To cover unexpected short term crisis
To adhere to the liquidity ratio

Inflation
Inflation is an economic situation in which prices of goods and services are rising continually, causing
a corresponding fall in the value of money

Theories
Demand push inflation
Open Inflation: rise in cost of products as a result of spending trends. It occurs when price mechanisms
take its full course.
Cost push inflation
Imported inflation

Types
Hyper inflation
Creeping inflation
Suppressed inflation

Causes Solutions
Surplus budgeting
Subsidies
Excessive government expenditure Contractionary fiscal policy
Excessive bank lending Contractionary monetary policy
Commercial policy Commercial policy
Low domestic productivity Increase in production
Poor distributive system Efficient distribution
Population increase Population control
Wage increase
War/Civil unrest

Effects
Redenomination of currency
Reduction in welfare
Reduction in real income
Reduction in purchasing power
Reduction of real debt
Reduction of saving
Increased nominal investments
Changes in resource allocation

Inflation from nigerian civil war, udoji

An inflationary gap, in economics, is the amount by which the actual gross domestic product exceeds
potential full-employment GDP.

Unemployment: It is a situation where labour is idle instead of being engaged in productive activity.
You talk about voluntary, involuntary and underemployment.

Types
Hidden: Not first preference
Disguised: Not contributing
Frictional: Contradictory
Structural: Fall in demand for industy's products
Mass/Cyclical: General
Seasonal
Technological
Search
Reisidual: Disabilities

The natural rate of unemployment is a combination of structural and frictional unemployment.

Causes Solutions
Industrialization
Incentives to investors
Deficit budgeting
Labour saving devices
Ineffective labour exchanges Organised labour market
Immobility of labour Enhancing labour mobility
Concentration of urbanisation Industrial location policy
Rural/urban transformation
High population Population control
Slow economic growth Development plan
Poor education and skill Education and skill aquisition policies
Deficiency of demand

Effects
Reduction in welfare
High rate of dependency
Increase in crime rate and violence
Migration
Recession/reduction in output

Stagflation is a situation where there is persistent increase in price levels accompanied by rising levels
of unemployment and slow economic growth, while demand remains stagnant.

Phillips curve: The theory was propounded by AW Phillips. It shows the negative relationship between
wage inflation and unemployment rate in 19th century. Later it changed to price inflation. If
unemployment is low (high rate of employment), wages would be high. The whole concept has been
disproven by stagflation.