Money and Banking 2nd Grade (Credit) Lesson 1 PDF

Money and banking Second grade ( Credit ) Lesson 1 What is money ? Money ( or the money supply) can be defined as anything that is generally accepted in payment for goods and services or in the repayment of debts. The difference between money and currency : Money : is anything that is gener...

Money and banking Second grade ( Credit ) Lesson 1 What is money ? Money ( or the money supply) can be defined as anything that is generally accepted in payment for goods and services or in the repayment of debts. The difference between money and currency : Money : is anything that is generally accepted in payment for goods and services or in the repayment of debts. for example : currency , gold , silver , e- money and electronic cash. Currency : consisting of dollar bills and coins. Currency is a part of money. The difference between income and wealth: Wealth: is the total collection of pieces of property that serve to store value such as income, bonds , stock ,land , gold ,silver ,cars and houses. Income : is a flow of earnings per unit of time. Functions of money: _Medium of exchange: it is used to pay for goods and services. Eliminates the trouble of finding a double coincidence of needs ( reduces transaction costs ). Promotes specialization. _Unit of account: it is used to measure value in the economy. Reduces transaction costs. _Store of value : it is used to save purchasing power over time. Other assets also serve this function. The most function that distinguish money from any other thing that it is medium of exchange. Money: is the most liquid of all assets but loses value during inflation. Features of money : _Easily standardized _Widely accepted _Divisible _Easy to carry _Not deteriorate quickly Evolution of the payment system: Payments system : is the method of conducting transactions in the economy. Barter economy : exchange goods directly in the market with other goods. _ It has high transaction cost. Transaction cost : is the effort and time spent trying to exchange goods and services. Commodity money : valuable , easily standardized and divisible commodities ( e.g. precious metals , cigarettes). Fiat money : paper money decreed by government as legal tender. Checks ( Cheques ) : an instruction to your bank to transfer money from your account to someone's account when she deposits the cheque. Electronic money ( e-money) : is the money stored electronically. For example: debit card , credit card , stored value card ( Smart card ), prepaid card and online banking. Electronic cash : is a form of electronic money that can be used on the internet to purchase goods and services. Measuring money: Liquidity : is the relative ease and speed with which an asset can be converted into a medium of exchange. Money is the most liquid asset because it is the medium of exchange. _The federal bank has set these measures of the money supply ( called monetary aggregates ). M1 ( most liquid assets)= currency+ traveller's checks + demand ( current ) deposits + other checkable deposits. M2 ( adds to M1 other assets that are not so liquid ) = M1+ small denomination time deposits and repurchase agreements + savings deposits and money market deposit accounts + money market mutual fund shares ( retail or noninstitutional ). M3 = M2 + large denomination time deposits and repurchase agreements+ Money market mutual fund shares ( institutional ) + repurchase agreements + Eurodollars Difference between transaction deposits and nontransaction deposits : Transaction deposits ( demand deposits) Nontransaction deposits ( e.g. saving deposits , time deposits)