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Money, Banking & Monetary Policy: Group 3

This document discusses money, banking, and monetary policy. It defines money and describes its key functions such as being a medium of exchange, unit of account, store of value, and means of deferred payment. It also outlines the characteristics of money and how it is measured, including different components of the money supply. The document then discusses banking, including the services banks offer and key terms like reserve requirements. It introduces the money multiplier concept and explains how the money supply can be controlled through open market operations, reserve requirements, and interest rates. Finally, it differentiates between expansionary and contractionary monetary policy.

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Eloiza Lajara Ramos
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53 views25 pages

Money, Banking & Monetary Policy: Group 3

This document discusses money, banking, and monetary policy. It defines money and describes its key functions such as being a medium of exchange, unit of account, store of value, and means of deferred payment. It also outlines the characteristics of money and how it is measured, including different components of the money supply. The document then discusses banking, including the services banks offer and key terms like reserve requirements. It introduces the money multiplier concept and explains how the money supply can be controlled through open market operations, reserve requirements, and interest rates. Finally, it differentiates between expansionary and contractionary monetary policy.

Uploaded by

Eloiza Lajara Ramos
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Money, Banking &

Monetary Policy
GROUP 3
ABJELINA, Ian Benedict
ALVAREZ, April E
.
ESLAVA, Bobby Joseph M.
FAJARDO, Angelica Mae
LUMBERA, Patricia Alliah
Money
Anything that people regularly use to
buy goods and services

A medium that can be exchanged for


goods and services

Anything accepted as means of


paying for goods and services
Functions of Money
BASIC FUNCTIONS

1. To facilitate the exchange of goods and


services

2. To lessen the time and effort required to


carry on trade

3. To enable trade to be carried on as


cheaply as possible
Four Important Functions of Money
1. As a Medium of Exchange
- primary function of money

- to facilitate transactions and to


lower transactions costs

Barter System
- System of trading goods for goods,
service for service, goods for service and
service for goods
Four Important Functions of Money
-Begun in 600 B.C

-Adopted by Phoenicians and


developed and improved by
Babylonians

- SALT is the most valuable goods in


this system
Four Important Functions of Money
ADVANTAGES
No need to use money
There is flexibility
Do not have to part a material
items
DISADVANTAGES
Tends to slowdown trade ,it
being cumbersome or burdensome
Four Important Functions of Money
Lack of double coincidence of wants
Lack of proper way to equate the
values of the things exchanged
Indivisibility of some goods

2. As a Unit of Account
- money serves to lower the
information costs involved in making
transactions
Four Important Functions of Money
3. As a Store of Value
- money can provide a means of
saving or storing things of value in
an efficient manner

4. As a Means of Deferred Payment


- money make it much easier to
borrow and to repay loans.
Characteristics of Money
Utility
General Acceptability
Portability
Uniformity
Malleability
Durability
Non Counterfeitability
Cognizability
Divisibility
Stability of Value
Measuring Money
Currency
- consist of coins or paper created by the
government to be used in trading goods and
services and payment of debts
Legal Tender
- coins and paper officially declared to be
acceptable for the settlement of financial
debts
Fiat Money
- a means of exchange established by
government declaration
Measuring Money
Demand Deposits
- balances in bank accounts that depositors
can access on demand
Transaction Deposits
- deposits that can be easily converted to
currency or used to buy goods and services
directly
Travelers Checks
-transaction instruments easily converted
into currency
Measuring Money
Nontransaction Deposits
- funds that cannot be used for payment
directly but must be converted into currency
for general use
Near Money
- Nontransaction deposits that are not
money but can be easily converted into
money
Money Market Mutual Funds
- interest- earning accounts provided by
brokers
Money Supply
M1 the narrowest definition of money
-it includes Currency, Checkable Deposits,
and Travelers Checks

M2 the broader definition of money


- it includes M1 plus Savings Deposits,
Time Deposits, and Money Market Mutual
Funds
How was Money Backed?
Gold Standard
- defining the dollar as equivalent to a a
set value of quantity of gold, allowing direct
convertibility from currency to gold

Greshams Law
the principle that cheap money drives
out money; given an alternative, people
prefer to spend less valuable money
BANKING
The business conducted or the services
offered by the bank

Also known as Commercial Banking

Commercial Banks
- Represent the largest single group of the
countrys banking and financial
intermediaries
BANKING
- offers the greatest variety of banking
serving among financial institutions such
as:
Accepting demand, savings, time and
foreign currency deposits
Handling local foreign currency deposits
Handling foreign fund remittances, money
market transactions
Host of other services that truly make
them the department stores in finance
BANKING
Reserve Requirements
-holdings of assets at the bank
Required Reserve Ratio
- the percentage of deposits that a bank must
hold at the banks vault
Fractional Reserve System
- system that requires banks to hold reserves
equal to some fraction of their checkable
deposits
Money Multiplier
Money Multiplier
- measures the potential amount of money
that the banking system generates with each
dollar of reserves
To get the size of money multiplier:

1/ reserved requirement = Money Multiplier

To get the potential money creation:

Initial deposit x Money Multiplier = Potential money creation


Money Multiplier
FIGURE 1: The Multiple Expansion Process
MONETARY POLICY
the process by which the monetary
authority of a country controls the supply of
money, often targeting an inflation
rate or interest rate to ensure price stability
and general trust in the currency
GOALS:
- To promote maximum employment
- To promote stable prices
- To promote moderate long-term interest
rates
Three Major Methods to Control
The Money Supply
Open Market Operations
- involve the purchase and sale U.S.
government bonds by the Federal Reserve
System
Reserve Requirements
- the tool that is so potent, in fact, that
is seldom to use
- small reduction can make a huge
change in the number of dollars that are in
excess reserves in bank all over the country
Three Major Methods to
Control The Money Supply
Discount Rate
- interest rate that the Fed charges
commercial banks for the loans it extends to
them

REDUCING MONEY SUPPLY INCREASING MONEY SUPPLY


Sell Bonds Buy Bonds

Raise Reserve Requirements Lower Reserve Requirements

Raise the Discount Rate Lower the Discount Rate


Types of Monetary Policy
Expansionary Monetary Policy
- increases the total supply of money in
the economy more rapidly than usual

- traditionally used to try to


combat unemployment in a recession by
lowering interest rates in the hope that
easy credit will entice businesses into
expanding
Types of Monetary Policy
Contractionary Monetary Policy
- expands the money supply more
slowly than usual or even shrinks it

- is intended to slow inflation in order


to avoid the resulting distortions and
deterioration of asset value
Types of Monetary Policy
Expansionary Monetary
FIGURE 2: Contractionary Monetary
FIGURE 3:

Policy in a Recessionary Gap Policy in an Inflationary Gap

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