Md.

Firoz Ahmed
Economics Discipline
Khulna University
What is money?

Money has been defined in various ways. According to

walker “money is what money does”

According to Robertson “anything which is widely

accepted in payment for goods or in discharge of other
kind of obligations.”

In a word we can say money is an intermediately in the

exchange process of the economy. In other word money
is something which posses from hand to hand in the
settlement of business transactions.
Functions of money
Money as a medium of exchange:
Money as a standard measure of value:
Money as a standard of deferred payment:
Money as a store of value:
Money as liquid assets:
Money as a transfer of value:
How money does remove the inconvenience
of barter system
Meet the difficulties to purchase according to the
requirement.

A man with wheat certainly doesn’t know how much

rice he will get in return of it.

Seasonal variation & stock variation of product

Goods can not be stored (perishable), While money

has store value (stored for long time without value
change. )

Good are not so liquid as money.

What is barter system?
When exchange is done without the intervention
of money, we call it barter. Barter, however, is
possible only under extremely simple conditions
of exchange.

Difficulties of barter system?

1. Double coincidence of wants:

2. A time consuming process:

3. Indivisibility of certain articles:

4. Lack of common measure of value:

Difficulties of barter system (Contd.)
5. Difficult to transfer assets to a distant place:
6. Lack of storing facilities:
7. Lack of liquidity:
Types of money
Legal aspect: Legal aspect include legal tender and bank
money.
Legal tender: legal tender means those kinds of money
which are acceptable by the force of law. Technically it is
called currency. Thus notes and coins issued by the central
bank or by the govt. is called legal tenders.
Bank money: Bank money consists of chequeable deposit.
Deposit arises in two ways.
 People with surplus money deposit money into bank
which provides him with cheque book enabling him to
withdraw the amount any time.
 Bank may grant loan to a person and credit the amount to
his account.
Types of money (Contd. )
On the basis of composition:
Metallic money: Also called coins – pieces of metal,
uniform in shape, weight and quality, stamped and
certified as a legal mean of exchange.
Paper money: Consist of paper notes issued by the
govt. or by the bank which circulate freely as a
medium of exchange.
Types of money (Contd. )

Intrinsic value: Under this head money is classified

considering its value.
Commodity money or full bodied money: An item
that serves as money and also has intrinsic value as a
marketable item. For example: gold coins.
Paper money or fiat money: Money that is accepted as
medium of exchange because of govt. decree rather
than because of its intrinsic value as commodity. For
example notes of 500 taka.
Central bank (What is it?)
Central bank is an institution that is charged with
regulating the size of a nation's money supply, the
availability and cost of credit, and the foreign-
exchange value of its currency.
According to prof. Kisch and Elkin, “central bank is a
bank whose essential duty is to maintain stability of
monetary standard.”
According to prof. Howtrey, “central bank is the
lender of last resort.”
According to prof. Show, “central bank is the bank
which control credit.”
Function of central bank
To issue note:
Bank of the state:
Economic analysis:
Bank of the banks:
Credit control:
Last stop of loan:
To maintain the international value of domestic currency:
Buy and sell foreign currency:
Clearing house:
Loan to government:
To maintain the internal value of currency:
Function of central bank (contd. )
Banking service:
Relationship with other countries:
Overcome a slump:
Select minimum reserve ratio:
Bangladesh bank
The Bangladesh Bank is the central bank of Bangladesh. It
started its journey just after the liberation of the country
and formally replaced the then State Bank of Pakistan
under the Bangladesh Bank Order 1972. The capital of
Bangladesh Bank has been fixed to taka three crore. The
general superintendence and direction of the affairs and
business of the bank is entrusted to a Board of Direction
which is consist of the governor, one or more deputy
governor, four director and one government official.
Commercial banks
Commercial bank is the base of today's modern
banking system. For this reason commercial bank is
called the mother of modern bank.
Prof. Roger said, “The banks which deal with money
and money worth with the view to earn profit is
known as commercial bank.”
Prof. A Nath said, “Commercial bank is the
intermediary profit making institutions.”
Commercial bank is a bank which collects deposits at a
lower interest rate and provides loans at higher
interest rate, honor cheques placed by the
depositors, creates medium of exchanges as well as
engaged in other profit making activities.
Function of commercial bank
1. Receiving deposit:
 Current or demand deposit.
 Fixed of time deposit.
 Savings deposit.
2. Fund transfer:
3. Discounting bill:
4. Formation of capital:
5. Encourage savings:
6. Means of exchange:
7. Advancing loan:
8. Miscellaneous function:
 Some commercial banks except bills on behalf of their
client.
 Commercial banks supply information and advices to its
client on the matter related to investment.
 Commercial banks provide security for valuable things.
 Commercial banks purchase or sell stocks on behalf of
their clients.
 Commercial banks make sundry payments on behalf of
their clients.(i.e. insurance premium, telephone bill etc.)
Inflation
Inflation is a phenomenon of continuous rise in the
general price level of goods and services. Inflation is
not a rise in the prices of one or just few goods, and
it is also not a just one-time rise in the prices of most
commodities. During inflationary periods, prices of
few goods may fall, but prices of most goods rise.

Inflation can also be defined as a decline in the value

or purchasing power of dollar. If the supply of dollar
(money) rises faster than the supply of goods and
services in the country, one would expect a decline
in the value of dollar. Thus, an increase in money
supply can be a reason of inflation.
In economics, inflation is a rise in the general level of
price of goods and services in an economy over a
period of time.
When the price level rises, each unit of currency buys
fewer goods and services; consequently, inflation is
also an erosion in the purchasing power of money –
a loss of real value in the internal medium of
exchange and unit of account in the economy.
If the demand for goods and services continuously
rises faster than their supply, prices of goods and
services shall rise too. This is called demand-pull
inflation. On the other hand, a continuous fall in
supply of goods and services or a continuous rise in
cost of production pushes up the general price level.
This is called cost-push inflation.
Hyperinflation
Hyperinflation is a run-away or “out of control” inflation, a
very rapid and high growth rate of prices. There is no
universally accepted cut-off rate of inflation for
hyperinflation. Some economists consider 50 percent or
higher monthly inflation as hyperinflation, whereas some
other economists consider an annual inflation rate of
200% or more as hyperinflation.
Monetary and Fiscal Policy
Monetary policy affects the supply of money
(basically currency plus commercial bank demand
deposits) and the rate of interest. Monetary policy,
the management of money and interest rates.

Fiscal policy includes the rate of taxation and level of

government spending. Fiscal policy involves
decisions about government spending and taxation.
Monetary policy is referred to as either being an
expansionary policy, or a contractionary policy,
where an expansionary policy increases the total
supply of money in the economy rapidly, and a
contractionary policy decreases the total money
supply or increases it only slowly.

Expansionary policy is traditionally used to combat

unemployment in a recession by lowering interest
rates, while contractionary policy involves raising
interest rates to combat inflation. Monetary policy is
contrasted with fiscal policy, which refers to
government borrowing, spending and taxation.
An inflationary gap, in economics, is the amount by
which the real Gross Domestic Product, or real
GDP, exceeds potential GDP. The real GDP is also
known as GDP "adjusted for inflation", "constant
prices" GDP or "constant dollar" GDP, because it
measures the aggregate output in a country's income
accounts in a given year, expressed in base-year
prices.
On the other hand, the potential GDP is the quantity of
real GDP when a country's economy is at full-
employment.
Open market operation: During inflation, the central
bank sells govt. securities and price bonds in the open
market in order to contract the supply of money.
The central bank can sell of purchase little and dilatory
debt papers from the commercial bank to control the
supply of money. The central bank can also control
the money market by selling dept paper to the people
during the rising of money and by purchasing during
the fall of money.
The monetary base (also called high-powered money) equals currency in
circulation C plus the total reserves in banking system R. The
monetary base MB can be
expressed as MB = C + R
The primary way in which the Central Bank causes changes in the
monetary base is through its open market operations. A purchase of
bonds by the Central Bank is called an open market purchase, and a
sale of bonds by the Central bank is called an open market sale.
An open market purchase causes the funds rate to fall, whereas an open
market sale causes the funds rate to rise.
Open market operations are the most important monetary policy tool,
because they are the primary determinants of changes in interest rates
and the monetary base, the main source of fluctuations in the money
supply. Open market purchases expand reserves and the monetary
base, thereby raising the money supply and lowering short-term
interest rates. Open market sales shrink reserves and the monetary
base, lowering the money supply and raising short-term interest rates.