Understanding Money and Banking Asst. Prof. Dr. Serdar AYAN

“A banker is a fellow who lends you his umbrella when the sun is shining, and wants it back the minute it begins to rain.” ~ Mark Twain

Money is anything that is generally accepted as a medium of exchange. An Overview of Money What Is Money? Money is anything that is generally accepted as a medium of exchange. A Means of Payment, or Medium of Exchange barter The direct exchange of goods and services for other goods and services. medium of exchange, or means of payment What sellers generally accept and buyers generally use to pay for goods and services. 3 of 31

The Functions of Money Medium of Exchange Store of Value Unit of Account

An Overview of Money What Is Money? A Store of Value store of value An asset that can be used to transport purchasing power from one time period to another. liquidity property of money The property of money that makes it a good medium of exchange as well as a store of value: It is portable and readily accepted and thus easily exchanged for goods. A Unit of Account unit of account A standard unit that provides a consistent way of quoting prices. 5 of 31

What Is Money? Portability Divisibility Durability Stability

The Spendable Money Supply: M-1 M-1: Measure of the money supply that includes only the most liquid (spendable) forms of money Currency: Government-issued paper money and metal coins Check: Demand deposit order instructing a bank to pay a given sum to a specified payee Demand Deposit: Bank account funds that may be withdrawn at any time

M-1 plus the Convertible Money Supply: M-2 M-2: Measure of the money supply that includes all the components of M-1 plus the forms of money that can be easily converted into spendable form Time Deposit: Bank funds that cannot be withdrawn without notice or transferred by check Savings Deposits Credit Cards

The Money Supply M1: Spendable M2: Spendable plus Convertible Currency Demand deposits M2: Spendable plus Convertible Time deposits

Money Supply (trillions) Money Supply Growth 1964 1969 1974 1984 1984 1989 1994 2001 5.4 5.0 4.4 4.0 3.4 3.0 2.4 2.0 1.4 1.0 0.4 Money Supply (trillions) M-2 M-1

Banks As Creators of Money $100.00 $10.00 $90.00 $190.00 90.00 9.00 81.00 271.00 81.00 8.10 72.90 343.00 72.90 7.29 65.61 409.51 65.61 6.56 59.05 468.56 Deposit Money held in Reserve by Bank Money to Lend Total Supply

The Central Bank System Functions Banking for the government Banking for banks Controlling the money supply

Controlling the Money Supply The Tools of the Central Bank Reserve requirements Discount rate controls Open market operations Selective credit controls

The Central Bank System Discount rate : The interest rate that banks pay for Reserve Bank to borrow from it. Open Market Operations : The purchase and sale by the Reserve Bank of government securities in the open market ; a tool used to expand or contract the amount of reserves in the system and thus the money supply.

Banks as Creators of Money By taking in deposits and making loans, banks expand the money supply.

Bolstering International Trade World Bank Provides a limited scope of financial services International Monetary Fund (IMF) Stable exchange rates Temporary short-term loans Cooperation on global monetary issues International payments system

The World Bank and the IMF World Bank (technically the International Bank for Reconstruction and Development) provides only a very limited scope of services. The International Monetary Fund (IMF): a group of some 150 nations that have combined resources to: promote the stability of exchange rates provide temporary, short-term loans to member countries encourage members to cooperate on international monetary issues encourage development of a system for international payments