economics

2. Money is the set of assets in an economy that
people regularly use to buy goods and services
from other
people.
THE MEANING OF MONEY

3. PROBLEMS OF BARTER SYSTEM

4. Continue

5. The Functions of Money
• Money has three functions in the economy:
• Medium of exchange
• Unit of account
• Store of value
• Tools for standard of deffered payment

6. The Functions of Money
• Medium of Exchange
• A medium of exchange is an item that buyers give to
sellers when they want to purchase goods and
services.
• A medium of exchange is anything that is readily
acceptable as payment.

7. The Functions of Money
• Unit of Account
• A unit of account is the yardstick people use to post
prices and record debts.
• Goods valued in dollars
• Store of Value
• A store of value is an item that people can use to
transfer purchasing power from the present to the
future.
• Hold some wealth in money form

8. The Functions of Money
• Liquidity is the ease with which an asset can be
converted into the economy’s medium of
exchange.

9. The Kinds of Money
• Commodity money takes the form of a
commodity with intrinsic value.
• Examples: Gold, silver, cigarettes.
• Fiat money is used as money because of
government decree.
• It does not have intrinsic value.
• Examples: Coins, currency, check deposits.

10. Money in the Economy
• Currency is the paper bills and coins in the
hands of the public.
• Demand deposits are balances in bank accounts
that depositors can access on demand by
writing a check.

11. Bank Negara Malaysia - BNM
• Bank Negara Malaysia is the central bank for
Malaysia.
• It was established on 26 January 1959, under
the Central Bank of Malaya Ordinance, 1958

12. The governor of BNM
Section 9 (1) of the Central Bank of Malaysia Act 1958
provides that the Governor shall be appointed by the Yang
Di Pertuan Agong, and the Deputy Governors by the
Minister of Finance. Since the Bank's inception in 1959,
there has been 7 Governors.
• Tan Sri Dato' Sri Dr. Zeti Akhtar Aziz
Since May 2000
• Tan Sri Dato' Seri Ali Abul Hassan bin Sulaiman
September 1998 - April 2000
• Tan Sri Dato' Ahmad bin Mohd Don
May 1994 - August 1998
• Tan Sri Dato' Jaffar bin Hussein
June 1985 - May 1994
• Tan Sri Abdul Aziz bin Taha
July 1980 - June 1985
• Tun Ismail bin Mohamed Ali
July 1962 - July 1980
• Tan Sri W.H. Wilcock
January 1959 - July 1962

13. BNM : Objectives
1. To issue currency and keep reserves safeguarding the
value of the currency;
2. To act as a banker and financial adviser to the
Government;
3. To promote monetary stability and a sound financial
structure;
4. To promote the reliable, efficient and smooth
operation of national payment and settlement
systems and to ensure that the national payment and
settlement systems policy is directed to the
advantage of Malaysia; and
5. To influence the credit situation to the advantage of
the country.

14. Organisation Structure
The Governor is the Chief Executive Officer
of the Bank and is assisted by 2 Deputy
Governors and 5 Assistant Governors.
Departments in the Bank are organised in 5
divisions:-
1. Economics,
2. Investments & Operations,
3. Organisational Development,
4. Supervision
5. Regulation.

15. BANKS AND THE MONEY SUPPLY
• Banks can influence
the quantity of
demand deposits in
the economy and the
money supply.

16. BANKS AND THE MONEY SUPPLY
• Reserves are deposits that banks have received
but have not loaned out.
• In a fractional-reserve banking system, banks
hold a fraction of the money deposited as
reserves and lend out the rest.

17. BANKS AND THE MONEY SUPPLY
• The reserve ratio is
the fraction of
deposits that banks
hold as reserves.

18. Money Creation with Fractional-Reserve
Banking
• When a bank makes a loan from its reserves,
the money supply increases.
• The money supply is affected by the amount
deposited in banks and the amount that banks
loan.
• Deposits into a bank are recorded as both assets and
liabilities.
• The fraction of total deposits that a bank has to keep
as reserves is called the reserve ratio.
• Loans become an asset to the bank.

19. Banking Money Creation with Fractional-
Reserve
• This T-Account
shows a bank that…
• accepts deposits,
• keeps a portion
as reserves,
• and lends out
the rest.
• It assumes a
reserve ratio
of 10%.
Assets Liabilities
First National Bank
Reserves
RM10.00
Loans
RM90.00
Deposits
RM100.00
Total Assets
RM100.00
Total Liabilities
RM100.00

20. Money Creation with Fractional-Reserve
Banking
• When one bank loans money, that money is
generally deposited into another bank.
• This creates more deposits and more reserves to
be lent out.
• When a bank makes a loan from its reserves,
the money supply increases.

21. The Money Multiplier
• How much money is eventually created by the
new deposit in this economy?

22. The Money Multiplier
• The money multiplier is the amount of money
the banking system generates with each ringgit
of reserves.

23. Tools of Monetary Control
• The BNM has 3 tools in its monetary toolbox:
• Open-market operations
• Changing the reserve requirement
• Changing the discount rate

24. Tools of Monetary Control
• Open-Market Operations
• BNM conducts open-market operations when it
buys government bonds from or sells government
bonds to the public:
• When BNM sells government bonds, the money supply
decreases.
• When BNM buys government bonds, the money supply
increases.

25. Tools of Monetary Control
• Reserve Requirements
• BNM also influences the money supply with
reserve requirements.
• Reserve requirements are regulations on the
minimum amount of reserves that banks must hold
against deposits.

26. Tools of Monetary Control
• Changing the Reserve Requirement
• The reserve requirement is the amount (%) of a
bank’s total reserves that may not be loaned out.
• Increasing the reserve requirement decreases the
money supply.
• Decreasing the reserve requirement increases the
money supply.

27. Tools of Monetary Control
• Changing the Discount Rate
• The discount rate is the interest rate BNM charges
banks for loans.
• Increasing the discount rate decreases the money supply.
• Decreasing the discount rate increases the money supply.

28. Problems in Controlling the Money
Supply
• BNM’s control of the money supply is not
precise.
• BNM must wrestle with two problems that arise
due to fractional-reserve banking.
• BNM does not control the amount of money that
households choose to hold as deposits in banks.
• BNM does not control the amount of money that
bankers choose to lend.

29. Institution Description Examples
Commercial Banks State and national banks that provide checking and savings
accounts and make loans
JP Morgan Chase, Bank
of America, Citibank,
Wells Fargo
Thrifts Savings and loan associations, mutual savings banks, credit
unions that offer checking and savings accounts and make
loans
Charter One, New York
Community Bank
Insurance
Companies
Firms that offer policies through which individuals pay
premiums to insure against lose
Prudential, New York
Life, Northwestern
Mutual, Hartford
Mutual Fund
Companies
Firms that pool customer deposits to purchase stocks or
bonds
Fidelity, Vanguard,
Putnam, Janus, T Rowe
Price
Pension Funds Institutions that collect savings from workers throughout their
working years and then invest the funds to pay retirement
benefits
TIAA-CREF, Teamsters’
Union, CalPERs
Securities Firms Firms that offer security advice and buy and sell stocks and
bonds for clients
Merrill Lynch, Smith
Barney, Charles Schwab
Investment Banks Firms that help corporations and governments raise money
by selling stocks and bonds
Goldman Sachs, Morgan
Stanley, Deutsche Bank,
Nomura Securities
Major Categories of Financial Institutions
LO7

30. Summary
• The term money refers to assets that people
regularly use to buy goods and services.
• Money serves three functions in an economy:
as a medium of exchange, a unit of account,
and a store of value.
• Commodity money is money that has intrinsic
value.
• Fiat money is money without intrinsic value.

31. Summary
• Bank Negara Malaysia, BNM regulates
Malaysia’s monetary system.
• It controls the money supply through open-
market operations or by changing reserve
requirements or the discount rate.

32. Summary
• When banks loan out their deposits, they
increase the quantity of money in the
economy.
• Because BNM cannot control the amount
bankers choose to lend or the amount
households choose to deposit in banks, BNM’s
control of the money supply is imperfect.