MONEY AND BANKING

• Money

  Anything which is generally acceptable as a means of making payment
• Common forms of money

  • Notes and coins
  • Cheque books
  • Plastic money (debit and credit cards)
  • Automatic Teller Machine cards
• Money

  • Facilitates the process of specialisation and division of labour
  • In a barter system, where people exchange goods for goods, specialisation cannot be applied because of the problems associated with double coincidence of wants
• Characteristics of money

  • Acceptability - accepted by all its users
  • Recognisability - easily recognised by its users
  • Durability - money can be stored
  • Portability - easily carried by its users
  • Divisibility - can be broken down into smaller units
  • Scarcity - for money to command value, it must be scarce
  • Uniformity - must be uniquely identified by its users
• Money

  Anything which is generally acceptable as a means of making payment
• Common forms of money

  • Notes and coins
  • Cheque books
  • Plastic money (debit and credit cards)
  • Automatic Teller Machine cards
• Money

  • Facilitates the process of specialisation and division of labour
  • In a barter system, where people exchange goods for goods, specialisation cannot be applied because of the problems associated with double coincidence of wants
• Roles / functions of money

  • It acts as a medium of exchange
  • It is a store of value
  • It is a means of deferred payment
  • It is a measure of value
• Medium of exchange


  Money can be used to make daily transactions
• Reasons why people save money

  • Transactionary purpose
  • Precautionary purpose
  • Speculative purpose
• Roles / functions of money

  • It acts as a medium of exchange
  • It is a store of value
  • It is a means of deferred payment
  • It is a measure of value
• Means of deferred payment

  Money facilitates credit transactions. People can purchase goods on credit, that is, they can postpone payment
• Measure of value


  Money makes it possible to measure the value of commodities
• Unit of account


  Money can be used to record transactions
• Types of money


  • Commodity money: Sea shells, shark teeth etc.
  • Fiat money: Notes and coins
  • Fiduciary money: Plastic money (Credit or debit cards)
• Medium of exchange

  Money can be used to make daily transactions
• Reasons why people save money

  • Transactionary purpose
  • Precautionary purpose
  • Speculative purpose
• Means of deferred payment

  Money facilitates credit transactions. People can purchase goods on credit, that is, they can postpone payment
• Measure of value

  Money makes it possible to measure the value of commodities
• Unit of account

  Money can be used to record transactions
• Types of money

  • Commodity money: Sea shells, shark teeth etc.
  • Fiat money: Notes and coins
  • Fiduciary money: Plastic money (Credit or debit cards)
• Importance of commercial banks to

  • Consumers
  • Producers
  • Government
• Importance of commercial banks to consumers

  • Provide a guarantee for their savings
  • Provide loan facilities to increase consumption expenditures
  • Provide standing order facilities
  • Provide plastic cards (debit and credit cards) to purchase commodities
  • Provide storage for precious documents
• Importance of commercial banks to producers

  • Provide loan facilities to encourage investment
  • Provide cheque book facilities
  • Provide overdraft facilities
• Importance of commercial banks to government

  • Lend money to finance capital projects
  • Help manage the amount of money in circulation (money supply)
• Central bank


  A financial institution which supervises all the banking activities in a country
• Roles/Functions of central bank

  • Issue notes and coins
  • Act as a banker's bank
  • Act as the government's bank
  • Manage the public debt of the country
  • Manage the monetary policy of the country
  • Keep a reserve of gold, precious stones/metals and foreign currencies
  • Provide foreign exchange currency facilities
• Monetary policy


  The policy of the central bank regarding money supply
• Bank rate


  The main rate of interest, also known as the repo rate or Lombard rate
• Central bank

  Responsible for determining the bank rate (repo rate) which influences consumption expenditure of households
• Central bank reduces repo rate

  Encourages consumers to borrow more and increase consumption (e.g. construct house, purchase car)
• Central bank

  Determines the interest rate which influences investment decisions of producers
• Central bank reduces repo rate

  Encourages firms to borrow more for investment purposes
• Central bank


  • Helps manage money supply, public debt, and implementation of economic policies for the government and country
• Household

  A group of people (consumers) who have nearly the same way of living, spend part of their incomes to consume certain goods and services such as housing and food collectively
• Income


  Revenue or reward for the services provided by labour
• Disposable income

  Amount of income left after direct taxes have been deducted or any other deductions made
• Direct tax

  Tax imposed on incomes and wealth
• Indirect tax

  Tax on spending that is initially charged to the producer, but may be passed on to consumers depending on the price elasticity of demand
• Nominal income


  Monetary or money value of income