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Introduction to Money and Banking.pptx

  1. Red Sea University Faculty of Economics Management Introduction to Money and Banking Prepared by Lecturer Ilyas Adam Eid
  2. Money
  3. Course Contents • Introduction of Money and Banking • Definition of Money • Monetary system • Financial Markets • Financial institutions • Banking &scope of banks Operations • Functions of banking • Monetary theories • Inflation • Use of Gold and silver as money
  4. Money and Banking • Money is “a current medium of exchange, which is recognized and widely accepted. in payments for goods and services and for the settlement of debts”. • Money is the stock of assets that can be readily used to make transactions. • money is a current medium of exchange in the form of coins and banknotes; money.
  5. Types of Money Money comes in three forms: •commodity money, fiat money, and fiduciary money. •Most modern monetary systems are based on fiat money. •Commodity money derives its value from the commodity of which it is made, •fiat money has value only by the order of the government.
  6. Cont… • Fiduciary money includes demand deposits (such as checking accounts) of banks. Fiduciary money is accepted on the basis of the trust its issuer (the bank) commands. • Most modern monetary systems are based on fiat money. However, for most of history, almost all money was commodity money, such as gold and silver coins.
  7. Functions of Money • Medium of Exchange: When money is used to intermediate the exchange of goods and services, it is performing a function as a medium of exchange. • Unit of Account: It is a standard numerical unit of measurement of market value of goods, services, and other transactions. • Store of Value: To act as a store of value, money must be reliably saved, stored, and retrieved. It must be predictably usable as a medium of exchange when it is retrieved.
  8. Cont.. The Basis of Credit: • Money facilitates loans. Borrowers can use money to obtain goods and services when they are needed most. A Standard of Postponed Payment: • This is an extension of the first function • the use of money permits postponement of spending from the present to some future occasion.
  9. Cont…. • A Measure of Value: • Money is the measuring rod of everything. This serves two basic purposes: • (1) Households (consumers) can plan their expenditure and • (2) Business people can keep records of in- come and costs in order to work out their profit and loss figures.
  10. Characteristics of Money 1.Durability. A cow is fairly durable, but a long trip to market runs the risk of sickness or death for the cow and can severely reduce its value. 2. Portability. While the cow is difficult to transport to the store, the currency can be easily put in my pocket. 3. Divisibility. A 20-dollar bill can be exchanged for other denominations, say a 10, a 5, four 1s, and 4 quarters. A cow, on the other hand, is not very divisible.
  11. Cont…. 4.Uniformity. Cows come in many sizes and shapes and each has a different value; cows are not a very uniform form of money. Twenty-dollar bills are all the same size and shape and value; they are very uniform. 5. Limited supply. In order to maintain its value, money must have a limited supply. • The supply, and therefore the value, of 20-dollar bills and money in general are regulated by the Federal Reserve so that the money retains its value over time.
  12. Cont…. 7. Acceptability. • Money is generally accepted through out the world. • Even though cows have intrinsic value, some people may not accept cattle as money. In contrast, people are more than willing to accept 20-dollar bills. In fact, the U.S. government protects your right to use U.S. currency to pay your bills.
  13. Advantages of Money 1. Economical: • Paper money practically costs nothing to the Government. • Currency notes, therefore, are the cheapest media of exchange. • (ii) Convenient: • Paper money is the most convenient form of money. • A large amount can be carried conveniently in the pocket without anybody knowing it.
  14. Cont… (iii) Homogeneous: • One essential quality in money is that it must be exactly of the same type. • Even among the coins there are good and bad coins. • currency notes are all exactly similar. • It is a very suitable medium of exchange.
  15. Cont.. (iv) Stability: • The value of paper money can be kept stable by properly regulating its issue. (v) Elasticity • Paper money is absolutely elastic. • Its quantity can be increased or decreased at the will of the currency authority.
  16. Cont.. (vi) Cheap Remittance: • Money in the form of currency notes can be cheaply remitted from one place to another in an insured cover. (vii) Advantageous to Banks: Paper money is of very great advantage to the banks. They can keep their cash reserves against liabilities.
  17. END