Monetary Sector Unit 3 Quiz

Money and Its Definition

• Money is anything widely accepted in exchange for goods and services.
• Barter involves the direct exchange of goods, requiring a double coincidence of wants, which is inefficient in modern economies.

Requirements of Money

• General acceptability: Must be desired and recognized as acceptable for exchanges.
• Durability: Should withstand frequent handling without wear.
• Manageability: Must be portable, with a mass relative to its value.
• Homogeneity and divisibility: Uniform appearance and divisible into smaller units.
• Recognisability: Easily identifiable and distinguishable from other items.
• Value: Must be scarce and maintain a relatively stable purchasing power.

Functions of Money

• Medium of exchange: Universally accepted for transactions.
• Unit of account: Prices of goods expressed in money, enabling value comparison.
• Store of value: Holds wealth over time; alternatives include gold and stocks.
• Standard of deferred payment: Assures stable purchasing power for credit transactions.

Types and Payment Methods

• Types of money include cash, debit cards, credit cards, and digital payment methods.
• Debit cards transfer money electronically; credit cards signify available credit, not actual money.
• Cheques serve as payment instruments transferring money between accounts.

Central Bank Functions

• The Bank of Namibia (BoN) is the country’s central bank, acting as a banker for the government.
• Manages the banking system and updates it with technological advancements.
• Acts as a custodian of bank reserves and serves as the lender of last resort.

Functions of the Bank of Namibia

• Facilitates inter-bank clearing and settlement processes.
• Sole authority to issue national currency (notes and coins).
• Manages official reserves, including gold and foreign currency.
• Implements monetary and exchange rate policy, coordinating with the South African Reserve Bank (SARB).

Money Creation Process

• Banks create money through lending processes stimulated by deposits.
• The credit multiplier indicates how much money can be generated from an initial deposit.
• Example: A deposit of N$1,000 with a reserve requirement of 20% can generate a total of N$5,000.

The Multiplier Effect

• The multiplier's size is influenced by the cash reserve requirement: a higher reserve means a smaller multiplier.
• An increased reserve requirement results in a reduced ability to create money.
• The multiplier is calculated as 1 divided by the reserve requirement ratio.

Monetary Policy Instruments

• Restrictive policy: Raising reserve requirements limits money creation and decreases the money supply.
• Expansionary policy: Lowering reserve requirements enhances money creation potential and increases the money supply.

Open Market Operations

• Central banks buy and sell government securities to modify bank liquidity, money supply, and interest rates.
• Selling securities reduces banks' reserves, constraining their loan abilities.
• Buying securities boosts bank reserves, enabling more loans and increasing the money supply.