Money and Banking

( BE 220 )The Economics of Money, Banking

and Financial Markets.

By: Frederic S. Mishkin

Financial Market is:

Complex

Comprises many different types of private

financial institutions As :

Banks

Insurance companies

Mutual funds

Finance companies

Investment banks

All regulated by governments

Individual go to financial intermediaries

Why?

Financial intermediaries are important to well-

functioning financial markets?

Extend credit to one party but not to another?

Write complicated legal documents?

They are most regulated business in the economy?

Banks Are financial institutions that:

Accept deposits

Make loans

Commercial banks

Savings and loan associations

Mutual savings banks

Credit unions

A person to buy a car, house... He goes to the bank

Most people keep portion of their wealth in banks

Banks are largest financial intermediaries in our

economy

Insurance companies also

Finance companies also

Financial innovation:

In old days…

We deal with human to cash money or ask

about

our account balance...

Now …

we deal with ATM ( Auto Teller Machines )

We have new means of delivering new financial

services (E-Finance )

Money: Money Supply:

Any thing is accepted in payments for goods or services.

Or repayment of debts.

Money and business cycles:

1981-1982 total production of goods and services in USA

decreased

Unemployment rate increased to 10%

After 1982 the economy began to expand rapidly

1989 unemployment rate decline to 5%

1990 expansion ended

Unemployment raised to 7%

Why these cycles happened?

Money plays important role in generating business cycles

Money and inflation

Old days ...Thirty years ago…

• We buy one kilo of meet with SR 5

• We buy one kilo of sugar with SR 1

Now...

• We buy one kilo of meet with SR 30

• We buy one kilo of sugar with SR 4

The average price of goods and services is called

Average

Price Level

To solve inflation

•We have to know its causes!!

Increase in money supply leads to increase in price level

(Inflation)

Positive association between inflation and growth rate of

money supply

Money and Interest rate:

Money plays important role in interest rate fluctuations

Central banks / Federal Res. System is responsible for

conducting the monetary policy

Fiscal Policy and Monetary Policy:

Fiscal policy involves decisions about government

spending and taxation

Budget deficit = excess of government expenditures over

government revenues for a particular time period

Budget surplus =

Government must finance any deficit by borrowing

Budget surplus leads to a lower government debt burden

GDP (Gross Domestic Product)

What is Money? ( Meaning of Money )

Any thing that is generally accepted in payment for goods

or services or in repayment of depts.

Currency = Paper money or Coins

Checks , Checking account deposits considered as Money

Word Money is frequently used with wealth

Wealth includes not only money but also other assists

such as bonds, stocks, art, land, furniture, cars and houses

Money describe income

Income is flow of earning per unit of time

Functions of Money:

In all market transactions, Money is a medium of

exchange

It promote economic efficiency by minimizing time

spent in exchanging goods and services

Transaction cost is time spent trying to exchange goods

or services

First role of Money:

Money to be used effectively:

Easily standardized , to ascertain its value

Widely accepted

Divisible

Easy to carry

Second role of Money:

Is to provide a unit of account

It is used to measure value in economy

Third role of money:

Is store of value

To save purchasing power from time of income received

until time of spent

Money is not only store of value any asset (stocks, bonds,

land, houses..) can be used to store value

Liquidity is highly desirable, so the money but not other

assets

Hyperinflation : the inflation rate exceeds 50% per month

Evolution of Money:

Commodity Money:

Money universally accepted

Every one must be willing to take it in payment for goods

and services

Gold and silver served a commodity money

Gold and silver were very heavy and hard to carry from one

place to another

Fiat Money:

Paper Currency:

It carried a guarantee that it was convertible into coins or

into fixed quantity of precious metal

Checks:

A check is an instruction from you to your bank to transfer

money from your account to someone' else account

Electronic Payment:

Development of cheap computers and spread of internet

E-money:

Electronic payments technology can substitute not only

for checks, but for cash also

First form of e-money was Debit Card

Debit card enable consumers to purchase goods and

services by electronically transferring funds directly from

their bank accounts to a merchant's bank