Section 5 - Financial Sector

• Financial sector


  Section of the economy made up of firms and institutions that provide financial services to commercial banks and retail customers
• Financial sector


  • Comprises a broad range of industries including banks, investment companies, insurance companies, and real estate firms
  • Complex mix or networks of markets, households, businesses, governments, law and institutions interacting with one another
• Role of financial sector

  • Intermediation - takes funds from savers and lends them to borrowers (households, governments, businesses)
  • Mobilizes savings and facilitates payments and trades of goods and services
  • Promotes efficient allocation of resources
  • Plays a critical role in facilitating economic growth
• Money


  An item that is considered acceptable to be used as payment for goods and services and to settle debts
• Stages in the development of money

  • Commodity Money
  • Metallic Money
  • Paper Money
  • Credit Money
  • Plastic Money
  • Cryptocurrency
• Qualities of money


  • Acceptable
  • Durable
  • Portable
  • Divisible
  • Homogenous
  • Legal Tender
  • Relatively-scarce
• Functions of money


  • Medium of exchange
  • Store of value
  • Unit of account
  • Standard of deferred payment
  • Measure of value
• Commodity Money


  Money is a common thing used in the exchange for purchasing goods and services
• Barter system


  Exchange of goods and services for goods and services without the use of money
• Double coincidence of wants

  Ubiquitous problem in a barter economy, where in order to trade, each party must have something the other party wants
• Commodity Money


  • Red Shells
  • Copper Bells
  • Cocoa
• Problems with Commodity Money

  • Perishability
  • Indivisibility
  • Heterogeneity
• Metallic Money


  Metallic money made of pure and superior metals like gold and silver
• Paper Money


  A country's official, paper currency that is circulated for transactions
• Paper Money


  • U.S. dollar $
  • British Pound £
• Credit Money


  Monetary value created as the result of some future obligation or claim
• Plastic Money


  Slang phrase for credit cards, used to make purchases
• Cryptocurrency


  Digital money in electronic payment systems that generally do not require government backing or the involvement of an intermediary
• Cryptocurrency


  • Bitcoin
  • Dash
  • Litecoin
• The following video best explains the qualities and functions of money
• Liquidity


  The ease with which assets can be turned into cash
• Liquidity spectrum


  • Cash
  • Building society account
  • Gilt-edged security
• Types of demand for money

  • Transaction demand
  • Precautionary demand
  • Asset motive/speculative demand
• Transaction demand


  Money needed to buy goods - related to income
• Precautionary demand


  Money needed for financial emergencies
• Asset motive/speculative demand


  When people wish to hold money rather than buy assets/bonds/risky investments
• Money supply


  The total stock of money circulating in an economy
• Money supply classifications


  • M0
  • M1
  • M2
• M0


  The most liquid form of money - cash, central bank notes and coins
• M1


  Includes cash, checkable (demand) deposits, and traveler's checks - also called narrow money

  
• M2


  Includes M1 plus saving and time deposits, certificates of deposits, and money market funds - also called broad money
• Central Bank


  • Carries out a nation's monetary policy and controls its money supply
  • Influences interest rates and participates in open market operations to control the cost of borrowing and lending
• Roles of Central Bank

  • Sole authority to issue notes and coins
  • Banker to the government
  • Manage the national debt
  • Banker to all banks
  • Act as a last resort for other financial institutions
  • Financial agent for the government
  • Supervise other financial institutions
• Monetary policy


  Actions undertaken by a nation's central bank to control money supply and achieve sustainable economic growth
• Interest rates

  Central banks control or dictate interest rates to manage the macro-economy
• Reserve requirement ratio


  The portion of reservable liabilities that commercial banks must hold onto rather than invest or lend out
• Open market operations


  Central bank purchases or sales of government securities to expand or contract money in the banking system and influence interest rates
• Moral suasion


  Moral act of persuasion to influence or change behavior
• Direct monetary policy instrument


  Used by the Central Banks to influence monetary conditions
• Lowering the reserve requirement ratio

  1. Banks would have more money to lend or invest

  2. Influences monetary conditions and consumption