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Money & Financial Institutions. Circular Flow of Income. What is Money?. a store of value, A unit of account A medium of exchange” Without money you would have……………. Barter Problems with barter? Double coincidence of wants. Properties Of Money. Liquidity Scarcity Portability
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What is Money? • a store of value, • A unit of account • A medium of exchange” • Without money you would have……………. • Barter • Problems with barter? • Double coincidence of wants
Properties Of Money • Liquidity • Scarcity • Portability • Uniformity • Durability
Kinds Of Money • Convertible paper money The paper money that can be converted into gold and silver. Examples are Gold and Silver certificates… • ‘I promise to pay the bearer the sum of one pound on demand’
Commodity Money • Has value and can be used for other purposes.
Inconvertible money – legal tender - Notes and Coins issued by government.
Bank deposits • – Bank deposits Savings. • Either cash or deposit accounts.
Electronic money • - Examples are Credit Card, Debit card, Charge card
Interest Rates and Money • People hold more when interest rate is low and hold less when interest rate is high. Why is this the case?
Money Supply Definitions • M1 cash and notes and cash accounts in banks. • M2 includes M1 + deposit accounts in banks • M3 (M1 +M2) cash at non-bank institutions, e.g. Insurance companies and in Pension Funds.
Money Supply – Quantity Theory of Money MV=PT • M = Money • V =Velocity of Circulation • P = Prices • T = number of transactions
Why have money? • Transactions Demand purchases • Precautionary Demand For uncertain expenses • Speculative Demand Demand affected by changes in interest rates (what will happen to the demand for money if interest rates increase?)
Determination of Interest Rate • Supply and demand for money (if floating) • In most economies it is set by the central Bank.
Banking • Retail Banking day to day banks • Wholesale Banking – commercial and investment banks
MAIN FUNCTIONS OF THE BANK OF ENGLAND • Banker to the Government • Manages the issue of Government Debt • Banker to the Commercial Banks • Holds gold and foreign-exchange reserves • Manages the issue of notes and coins • Implements domestic monetary policy • It sets interest rates.
Tools for Changing the Money Supply • Changing the discount rate. • i.e. the rate the Central Bank charges when they make loans to large organizations. • Buying or selling bonds. • Buying bonds……… increases cash deposits within banks increases the nation’s M1 or M2 and therefore increases the money available to lend. • Selling bonds………. Reduces cash deposits within banks.