1. Money and Banking ( BE 220 ) The Economics of Money, Banking and Financial Markets. By: Frederic S. Mishkin

2. 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

3.  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?

4.  Banks  Are financial institutions that:  Accept deposits  Make loans  Commercial banks  Savings and loan associations  Mutual savings banks  Credit unions

5.  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

6.  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 )

7. Money:  Money Supply:  Any thing is accepted in payments for goods or services. Or repayment of debts.

8.  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

9.  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

10.  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

11.  Money and Interest rate:  Money plays important role in interest rate fluctuations  Central banks / Federal Res. System is responsible for conducting the monetary policy

12.  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)

13.  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

14.  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

15.  First role of Money: Money to be used effectively:  Easily standardized, to ascertain its value  Widely accepted  Divisible  Easy to carry

16.  Second role of Money:  Is to provide a unit of account  It is used to measure value in economy

17.  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

18.  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

19.  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

20.  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