CHAPTER 1

OVERVIEW OF THE STUDY ON MONEY,

BANKING AND FINANCIAL MARKETS
 INTRODUCTORY REMARKS
1. Financial Market
 Funds are transferred from people who have excess available
of funds to people who have shortage.

2. Security
 Also known as financial instruments
 For example bonds

3. Interest Rate
 Cost of borrowings or the price paid for rental of funds or
money.
 Interest is earned from savings account or certificate deposit
 Interest is paid for a credit card or mortgaged.

4. Money
 Anything that generally accepted as a medium of exchange or
repayment debt.
5. Aggregate Output
  total value or production of all the goods and services produced
in an economy.
 Aggregate output can be measured by Gross Domestic Product
(GDP) and Aggregate Income.

GDP : An estimated value of the total worth of a country’s

production and
services, on its land, by its nationals and foreigners, calculated
over the course on one year.

Aggregate Income : total income of factors of production (land, labor

and capital) from producing goods and services in economy.

6. Unemployment
 Number of available labor force unemployed.
7. Business Cycle
 Fluctuations or movements of aggregate output which are
production, trade and economic activity in the economy.
 4 stages of business cycle which are growth , peak, recession and
recovery

8.Nominal Value
Value is calculated using current prices

9. Real Value
Value is calculated using constant prices

10. Aggregate Price Level

General or aggregate price of the collective goods and services
produced in an economy over a period of time.
The calculation of the price level is based on various economy
factors like the effect of excessive demand and excessive supply
Deflation ;
When the consumers fail to buy as much product as before,the
aggregate price of the products will drop in response to the
sluggishness of the market.

A reduction of the interest rate may encourage the consumers

to obtain more money from banks and to spend more.

Inflation :
usually due to an excessive demand for goods and services that

may be more than the economy can sustained and may lead to
the rising price

Central bank may increase the interest rate or minimizing the

spending and demand that is pushing the general price of goods
and services upward.
Tools to measure Aggregate Price Level:

i.GDP Deflator : is defined as nominal GDP divided by real GDP. Its

measure of the level of prices of all new, domestically produced, final
goods and services in an economy. 

i.Consumer Price Index : measured by pricing a basket list of goods and

services bought by a typical urban household over a given period.
11. Financial Intermediaries
 institutions that borrow funds from people who saved and turn to
make loans to others
 example are investment banks and insurance companies

12. Recessions
 periods when aggregate output is declining

13. Inflation
 increase in price level

14. Monetary Theory

 explain the business cycle in term of money or credit supply

15. Monetary Policy

 regulating money supply and credit

16. Fiscal Policy

Variations in the government spending and government receipts in
order to achieve goals.
CHAPTER 3

EVOLUTION
OF MONEY
 BARTER ECONOMIES

• Pure Barter Economies

– Direct exchange of goods and services for other goods and services
– Shortcomings:
• Absence of a method of storing generalized purchasing power
• Absence of a common unit of measure and value
• Absence of a designated unit to use in writing contracts
requiring future payments
• Trading-Post economies (Organized Barter)

– Organize specific trading arrangements, however, to lessen the

problem of double coincidence of wants
– A common trading arrangement is the establishment of
physical locations, or trading posts, at which people see
specific types of goods or services. 
 MONETARY ECONOMIES
• Commodity Money Economies
–  money whose value comes from a commodity of which
it is made.
– Commodity money consists of objects that have value
in themselves as well as value in their use as money
– With the advancement in knowledge, people started
using metals like gold and silver as medium of
exchange
• Commodity Standards
– Minted coins with non monetary values developed
– Development of commodity standard occurred
– Tokens whose values are fully or partially related to, or
backed by, the value of a physical commodity such as
gold and silver are used
– Currently, fiat money is used in our daily lives
– Electronic monies (e-money) are becoming increasingly
important
• Several forms of e-money:
– Debit cards
• Enable users to purchase goods by electronically
transferring funds directly from their bank’s account
to a merchant’s account
– Stored-value card
• Contain fixed amount of digital cash
• The simplest stored-value card is the prepaid cards
– Electronic cash
• Form of electronic money that can be used on the
internet to purchase goods and services
– Electronic checks
• Allow users of the internet to pay their bills directly
over the internet without ever sending a paper check
FUNCTIONS OF MONEY
Medium of exchange
• People use money to buy and sell goods.
• Make the transactions easier.
• Money also eliminate the coincidence of wants.

Unit Of Account
• Money is use as measuring unit for price.
• Price of goods are state in monetary unit.
• Enables supplier and purchaser to make good decision.
Store of value
• Money must hold its value over time if not it cannot solve
the problems of double coincidence wants that occur during
barter system.
• Transactions cannot be done.

Deferred of payment
• A standard benchmark for specifying future payments for
current purchase.
• The amount of those future payment are stated in terms of
money.
• If money is the standard for current prices, then it is also
the standard for future payments based on those prices.
 Characteristics Of Money

Portability
• Can be easily moved from one location to another when
it is needed.
• People can carry it around with them an make the
transactions easier.

Durability
• Refers to the physical of the money.
• It retains the same shape, form and substances over an
period of time.
Divisibility
• Money can be divided into small that can be used in exchange
for goods or various values.

Standardization
• Money are standardize all over the world.
• Money can be use in everywhere in the world.
• Also cannot be duplicate.

Acceptability
• Being accepted by everyone in the economy.
• This is for the purpose of the exchange of money for goods
and different types of services.
Scarcity
• Refers to the limited supply of money.
• The more money that is in circulation the less it is valued
by the economy.

Recognization
• Money are recognize and know by everyone.
• It allows for money to be counted and measured accurately.
Circular Flow of Income in Economy
Money in Relation to Interest
Rates
A great concern to consumers and
businesses
Influenced by the process of demand
and supply
“the price of money”
 Money in Relation to
Foreign Exchange
Funds are remitted from one country
to another
Forex rate is the price of one country’s
currency in terms of another
The flactuated rate affect consumers
on the cost of foreign g&s
 Money and the Business
Cycle

It generates business cycle

> money = inflation
< money = deflation/recession
National
Output

BOOM

Long-run output
trend line
BOOM

RECOVERY

RECESSION DEPRESSION

Time (years)
MEASUREMENT
OF MONEY
• Transaction Approach
• The Liquidity Approach
– The Liquidity Continuum
– Liquidity and “Moneyness” of
Money Assets
 The Transaction Approach
• Emphasizes money’s function as a
medium of exchange.
• Assets that perform the function as a
medium of exchange that can defined
as money are:
– Coins
– Notes
– Checkable accounts (cheques)
• Not all assets can perform the function.
• All other assets serve as a store of value
• Only accept a few as a medium of
exchange
 The Liquidity Approach
• Emphasizes money’s function as a store of value.
• Ability to meet all financial commitments when
contractual due.
• Assets that individual can sell or redeem at
unknown future time.
• Divided into 2 perspectives
– The Liquidity Continuum
– Liquidity and “Moneyness” of Money Assets
 The Liquidity Continuum
• Function of money is a store of value
that plays a medium of exchange role.
• Assets are ranked based on sequence
based on different degree of liquidity.
• Money is the most liquid of all assets.
• All assets that are liquid could be money
based on their liquidity level.
 Liquidity and “Moneyness”
of Money Assets
• Assets that can convert to cash quickly,
without loss of nominal value and
without much cost.
• High liquid assets are called near
monies.
• The cutoff point along the asset-
liquidity continuum when categorizing
money and nonmoney is not clear.
M1 = (a) + (b) +c)
M2 = (a) + (b) + (c) + (d) at commercial banks
M3 = M2 + (a) + (b) + (c) + (d) at other financial
institutions
 The purpose more than one
measure of money supply
 Financial system continually introduce
new financial instruments.
 For ease of
control/coordination/supervision.
 for ease of setting up objective/targets.