Chapter 16: Money & Banking

• Money: a medium of exchange to purchase goods and services
• Forms of money: cash, bank deposits and central bank reserves
• Functions of money:

  • Medium of exchange
  • Measure of value/unit of account
  • Store of value
  • Standard of deferred payments
• Characteristics of money (S.A.D.D.U.P.):

  • Scarcity: limited to keep its value
  • Acceptability: widely recognized and accepted
  • Durability: long-lasting but easily replaced
  • Divisibility
  • Uniformity: all banknotes of the same value look the same
  • Portability
• Bartering: act of swapping items in exchange for other items through bargaining and negotiation
• Double coincidence of wants: to barter, both partiers need to have something the other wants
• Problems with bartering:

  • There has to be a double coincidence of wants
  • Items bartered may not be divisible
  • Cash may be more portable than what's bartered
• Central bank: the government's bank that controls the monetary policy in an economy
• Functions of a central bank:

  • Sole issuer of banknotes and coins: has sole rights to issue legal tender in its own country; helps bring uniformity and improve public confidence in the monetary system
  • Government's bank: manages public sector's payments and debts and represents the government in international financial markets
  • Banker's bank: bank for other banks in the country, overseeing the cash reserves of commercial banks
  • Lender of last resort: central bank keeps a certain percentage of cash balances as a deposit for financial emergencies
• Commercial bank: a retail bank that provides financial services to its customers
• Primary functions of commercial banks:

  • Accepting deposits: sight and time deposits for the convenience of financial operations
  • Making advances: provides advances (loans), including overdrafts and mortgages
  • Credit creation: increasing money supply in an economy by making money available to borrowers
• Secondary functions of commercial banks:

  • Collecting and clearing cheques of clients
  • Offering financial services (tax advice, foreign exchange dealings, etc)
  • Providing safety deposit boxes to safeguard valued possessions
  • Providing money transfer facilities (transferring money to pay bills, etc)
  • Offering credit card facilities for customers' convenience
  • Offering internet banking facilities (online bill payments, wired bank transfers)