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Money & Monetary Policy

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Money & Monetary Policy

  1. 1. Presentation On: Money & Monetary Policy PREMIER UNIVERSITY
  2. 2. Prepared By: Sanjida Ashrafi (Ananya) Department of Accounting, Premier University, Chittagong.
  3. 3. Money is an officially issued legal tender generally consisting of notes and coin, and is the circulating medium of exchange as defined by a government. What is Money?
  4. 4. Function of Money • A Medium of Exchange • A Means of Storing Wealth • A Means of Evaluation • A Means of Establishing Value of Future Claims and Payments.
  5. 5. Exchange Of Money Payment of goods and services and as a means of payment of labor and other factor services
  6. 6. Storing Wealth People need a means whereby labor can be used to purchase goods and services in future. People need to be able to store their money; the want a means of saving.
  7. 7. Means of Evaluation Money allows the value of goods, services or assets to be compared. The value of goods is expressed in terms of prices, and prices are expressed in money terms.
  8. 8. Establishing The Value of Future Claims & Payments People often want to agree today the price of some future payment. Money prices are the most convenient means of measuring future claims.
  9. 9. Components of Money M1: Cash circulation with the public + overnight deposit M2: M1+ Deposits with agreed maturity M3: M2+ Repos+ Money market funds & paper+ Debt securities M4: Retail deposit & cash in M4+ Deposit in banks + Certificate of deposit
  10. 10. The Demand for Money • The Transactional Motive • The Precautionary Motive • The Asset Motive
  11. 11. The Supply For Money • The Monetary Base (or ‘High-powered money’)- consists of cash (notes and coin) in circulation outside the central bank. • Broad Money- Which in most cases includes both time and sight deposits, retail and wholesale deposits, and bank and building society (savings institution) deposits.
  12. 12. The Relationship Between Money Supply & Rate of Interest Exogenous money supply: Money supply that does not depend on the demand for money but is set by the authorities.
  13. 13. Endogenous money supply: Money supply that is determined (at least in part) by the demand for money. The Relationship Between Money Supply & Rate of Interest
  14. 14. Barter is a system of exchange where goods or services are directly exchanged for other goods or services without using a medium of exchange. What is Barter System?
  15. 15. Difficulties in Barter System 1. Double Coincidence of Wants, 2. Lack of a Standard Unit of Account, 3. Impossibility of Subdivision of Goods, 4. Lack of Information, 5. Production of Large and Very Costly Goods not Feasible.
  16. 16. Method of Credit Control • Quantitative Method- i) Bank Rate Policy, ii) Open Market Operation, iii) Changing the Cash Reserve Ratio. • Qualitative Method/ Selective Method.
  17. 17. Method of Credit Control: Quantitative Method Bank Rate Policy: Bank rate is minimum rate at which central bank of a country provides loans to the commercial bank of the country. Limitations of Bank Rate Policy: 1. If the commercial banks have considerable reserves, 2. If businessman & investors reduce their borrowings.
  18. 18. Open Market Operation: Open market operation means the purchase and sales of securities by the central bank. Limitations of the Open Market Operation: 1. Cash reserve will decrease when the central bank sells securities. 2. The percentage of cash credit can be vary within quite limits. 3. Cheap money rate may not attract borrowers. 4. The velocity of bank deposits is rarely constant. Method of Credit Control: Quantitative Method
  19. 19. Changing the cash reserve Ratio (CRR): It means by law, banks have to keep a certain amount of cash money with themselves as reserves against deposits. Method of Credit Control: Quantitative Method
  20. 20. Method of Credit Control Qualitative or Selective Method The qualitative or the selective methods objective is mainly to control and regulate the flow of credit into particular industries or businesses.
  21. 21. Role of Monetary Policy For Promoting Economic Growth Economic growth can be speeded up by accelerating the rate of savings and investment in the economy. This requires the following steps: a) Increase in the aggregate rate of savings in the economy, b) Mobilization of these savings so that are made available for the purpose of investment and production, c) Increase the rate of investment, d) Allocation of investment funds for productive purposes and priority sectors of the economy.
  22. 22. Role of Monetary Policy For Promoting Economic Growth Requirements of Economic growth: a) Monetary Policy and Savings, b) Monetary Policy and Investment, i)Cost of Credit ii)Monetary Policy and Public Investment iii)Monetary Policy and Private Investment c) Allocation of Investment Funds
  23. 23. Liquidity Trap The liquidity trap is the situation in which prevailing interest rates are low and savings rates are high, making monetary policy ineffective.
  24. 24. Quantity Theory of Money Factors of Quantity Theory of Money: a)The Volume of Trade or Transaction b)The Quantity of Money c) Velocity of Circulation of Money
  25. 25. The general level of prices is determined, that is, why at sometimes the general level of prices rises and sometimes it declines. Sometime back it was believed by the economists that the quantity of money in the economy is the prime cause of fluctuations in the price level. Quantity Theory of Money: Income Version
  26. 26. The total volume of money in a country, is equal to the total value of all goods and services. The total supply of money is obtained by = Quantity of money in circulation (M) X Velocity in circulation (V)or M x V=Total supply of money Fisher’s Equation of Exchange
  27. 27. Equilibrium in the money market is where the demand for money (L) is equal to the supply of money (Ms). This equilibrium is achieved through changes in the rate of interest. Equilibrium in the Money Market
  28. 28. When the supply of money in an economy, the nominal interest rate changes as a result. Increases the money supply, there is a surplus of money at the prevailing interest rate. Decreases the money supply, there is a shortage of money at the prevailing interest rate. Effect of Increase in Money Supply on the Rate of Interest

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