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3 1MoneyandBanking124

Money was created to overcome the inefficiencies of barter by providing a medium of exchange, unit of account, and store of value. Money has certain qualities that make it suitable for its role, such as acceptability, durability, portability, and scarcity. Specialization and trade require money because individuals cannot produce all goods themselves. Banks play an important role as financial intermediaries that accept deposits and make loans, while a central bank regulates the banking system and implements monetary policy.

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22 views12 pages

3 1MoneyandBanking124

Money was created to overcome the inefficiencies of barter by providing a medium of exchange, unit of account, and store of value. Money has certain qualities that make it suitable for its role, such as acceptability, durability, portability, and scarcity. Specialization and trade require money because individuals cannot produce all goods themselves. Banks play an important role as financial intermediaries that accept deposits and make loans, while a central bank regulates the banking system and implements monetary policy.

Uploaded by

William
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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3.

1Money and
Banking
3.1.1Money
• Why do we need money?

• To support specialization and exchange

• Your answer to both these questions will probably be no, but many years ago

• before the widespread use of money you would have had no choice. You

• would either have had to accept other goods or services as payment or be

• self-sufficient by producing everything you needed or wanted for yourself.

• Many of our ancestors had to be self-sufficient. All individuals or small

• communities would produce all the things they needed or wanted for

• themselves, for example by growing and hunting their own food supplies,

• building their own shelters, making clothes from wool and animal skins,

• producing cooking pots from clay and so on.

• However, it is difficult to produce everything you need or want for yourself.

• People have different skills.


• To overcome the problems of barter
• 1 Fixing a rate of exchange
• 2 Finding someone to swap with
• 3 Trying to save
The functions of money

1 Money is a medium of exchange

2 Money is a unit of account

3 Money is a store of value

4 Money is a means of deferred payment


What makes a good money?
1 Acceptability
2 Durability
3 Portability
4 Divisibility
5 Scarcity
So why is money so important?

If people specialize they must trade. A man concentrating on making pins

could not satisfy his need for food by eating pins or his need for clothes by

wearing pins. Therefore trade is a necessity for individuals to obtain those

things they cannot make on their own.

But in a barter system trade is difficult. There is no guarantee that an expert

pin-maker will be able to find people willing to swap their goods for his or

her pins at a fair rate of exchange.


• What is money?
• We now know that money is a generally acceptable medium
of exchange.
• However, we also know that to be money a commodity must
also act as store
• of value. Given this, our savings in banks and other financial
institutions can
• be classified as money because we can withdraw these
deposits so that they
• may be exchanged for the goods and services we want.
• Notes and coins (cash), and deposits with banks and other
financial institutions
• therefore make up the money supply in an economy.
• What is the market for money?
• Business organizations that specialize in providing
• these services are called financial institutions. Without financial institutions,
• specialized production and trade on the scale enjoyed today would not be
• possible, costs of production would be much higher, economies would be less
• developed and economic growth would be much slower.
• The money market is really no different from any other market. It is made
• up of all those people and organizations that want money, and all the people
• and organizations willing and able to supply money, namely a banking
• system that creates deposit money, and a central bank that issues notes and
• coins.
• What is a bank?
• The main types of financial institutions in the
market for money are banks.
• They are just like any other business except the
product they supply is money,
• in the form of Ioans and other financial
products.
• A bank is a financial intermediary because it
brings together customers who
• want to save money and customers who want to
borrow it.
• Types of bank
• 1 Commercial banks
• Commercial banks are often called 'high-street banks,
because they have retail
• branches located in most cities and towns. However, many
banks provide
• telephone and online banking facilities for their customers
so there is no need
• to visit a branch.
• 2 Credit unions
• A credit union is a cooperative, not-for-profit organization,
owned by and for
• its members.
• 3 Mutual societies
• 3 Investment banks
• 4 Islamic banks
• The role of a central bank
• It issues notes and coins for the nation's currency
• It manages payments to and from the government
• It manages the national debt
• It supervises the banking system, regulating the
conduct of banks,
• holding their deposits and transferring funds
between them
• It is the 'lender of the last resort' to the banking
system
• It manages the nations gold and foreign currency
reserves
• It operates the government's monetary policy
3.1.2Banking

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