Money and Banking

Money

What are the functions of money?

1. Money is a medium of exchange because it is generally acceptable in exchange for all goods and does not require a double coincidence.
2. A store of value as money tends to maintain its value over time and is not perishable.
3. Unit of Account as it can be used as the universal resource to express prices and values of other goods. 
4. Standard of deferred payments because money is

What are the characteristics of money?

1. Acceptable
2. Durable
3. Portable
4. Divisible
5. Homogeneous
6. Scarce

What is money?

Money is a medium of exchange of goods and services, it acts as a measure of value and a unit of account. It allows us to identify and compare the value of different goods. 

What is the money supply?

Money supply is the total value of bank deposits notes and coins in an economy.

Physical assets: Non-financial assets or physical products, such as commercial and residential properties, that have value and therefore contribute to worth.

Financial assets: Non-physical assets, such as bank deposits, shares, bonds, and other financial claims that have value.

Liquid assets: Financial assets that are ‘near money’ such as bank deposits, which can be converted into cash easily and quickly.

Near money: Financial assets that can easily be converted into liquid cash.

Banking

What is banking?

Banking is an industry that helps people borrow, lend, and carry out a range of other financial activities. Banks are financial intermediaries between borrowers and savers.

What are commercial banks?

Commercial banks are financial institutes with individual business customers that have retail branches in many towns and cities.

What are the functions of a commercial bank?

1. Accept deposits in the form of savings
2. Aid customers in making and receiving payments via their bank account
3. Give loans to businesses and individuals
4. Buying and selling shares for customers
5. Providing insurance
6. Providing financial and tax planning advice
7. Exchange foreign currencies

What are the aims of commercial banks?

1. Generate profit for its shareholders
2. Maintain liquidity

What are central banks?

A central bank is a financial institute that governs all other commercial banks in a country.

What is the role of a central bank?

1. Acts as a banker to the government as it allows the government to make and receive payments such as receiving tax revenue
2. Operates as a banker to commercial banks because having an account in the central bank permits a commercial bank to maintain liquidity when the outflow of cash is higher than usual.
3. Control the banking system as the central bank governs and regulates commercial banks in its country of operation.
4. Issues bank notes as the central bank is responsible for managing the presence of cash in the economy.
5. Holds the country’s reserves of foreign currency and gold as the central bank keeps these resources to influence exchange rates.

Act as a last resort lender as the central bank can supply cash to commercial banks as a last resort.