TOPIC 4

1. TOPIC 4 MONETARY ECONOMICS Azizah Isa

2. MONEY Azizah Isa

3. In the ancient time, where money is not yet introduced, transactions were done by exchanging one goods with another in a Barter System. Azizah Isa

4. Barter Trade System • A barter system is a direct trading or exchanging of goods between one person to another. • Barter system of course does not work successfully in a modern economy. Azizah Isa

5. Problems in Barter System • Double Coincidence of Wants. Azizah Isa

6. Problems in Barter System • Double Coincidence of Wants. • Value instability Azizah Isa

7. Problems in Barter System • Double Coincidence of Wants. • Value instability • Storage are impossible Azizah Isa

8. Problems in Barter System • Double Coincidence of Wants. • Value instability • Storage are impossible • Indivisible Azizah Isa

9. Problems in Barter System • Double Coincidence of Wants. • Value instability • Storage are impossible • Indivisible • No Standard of unit of account Azizah Isa

10. Problems in Barter System • Double Coincidence of Wants. • Value instability • Storage are impossible • Indivisible • No Standard of unit of account • Difficulties in paying debt Azizah Isa

11. Problems in Barter System • Double Coincidence of Wants. • Value instability • Storage are impossible • Indivisible • No Standard of unit of account • Difficulties in paying debt These problems may caused to: Azizah Isa

12. Problems in Barter System • Double Coincidence of Wants. • Value instability • Storage are impossible • Indivisible • No Standard of unit of account • Difficulties in paying debt These problems may caused to: waste of time, inconvenience, cumbersome and difficulties in making an exchange. Azizah Isa

13. Due to limitations in the Barter System, . Money is needed in a modern economy which act as a means of payment in the transaction of goods and services. Azizah Isa

14. WHAT IS MONEY? HOW DO YOU DEFINE MONEY? Azizah Isa

15. Definition of Money • Money can beanythingthat isgenerally acceptedby the publicas a medium of exchangein the transaction activities. Azizah Isa

16. Money act as a means of payment: Money actas: • a medium to transfer ownershipof goods and services from one person to another • and for the repayment of debts. Azizah Isa

17. Evolution of Money As time passed by, the money used varies accordinglyto meet the needs and purpose of using money. In the ancient time Commodity Moneyis used. • For example; gold, silver, stones, seashells, corns, wool and bones. Azizah Isa

18. The different types of commodity money. Museum of Bank Negara Malaysia Azizah Isa

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22. Commodity Money • In the use of gold, for example; its: • Precious metal such as gold and silver had its intrinsic valueas a full-bodied money. • Thus, if its intrinsic value is stated on its face therefore it is said that: Face Value = Commodity Market Value. Intrinsic value = Commodity Market Value. Azizah Isa

23. Modern Money • But nowadays, in the modern economy, there are many forms of money: Fiat money Azizah Isa

24. 2. Fiat Money Face Value (FV) > Commodity Market Value (CMV) • Example:coins and paper money (banknotes). • Although its FV is larger than its CMV, but still it isacceptable as moneybecause ofthe truth and faithin its acceptance as a legal tender in each specified country . Azizah Isa

25. The Ringgit and Sen (as in the picture above) are issued by Bank Negara Malaysia (BNM) as a legal tender in Malaysia. Azizah Isa

26. Modern Money • But nowadays, in the modern economy, there are many forms of money: Fiat money Bank money Azizah Isa

27. 3. Bank Money • A form ofNear Money– i.e. a financial asset which closely resemble money. • Examples:Current/Demand Deposits in banks (cheques), Credit Cards, Debit Cards, Stored Valued Cards, Smart Card ATM Cards and Saving Accounts. Azizah Isa

28. Modern Money • But nowadays, in the modern economy, there are many forms of money: Fiat money Bank money Electronic Money Azizah Isa

29. 4. Electronic Money/ e-money / e-purse / e-cash. Transfer of money electronically made over the internet. The acceptance of electronic payment in the transactions via internet. Example:e-cash ande-cheques Azizah Isa

30. “Money is what money does” • What does money can do for you? Azizah Isa

31. MONEY can does its FUNCTION for you. Azizah Isa

32. What are the FUNCTIONS of MONEY ? Azizah Isa

33. Four Main Functions of Money: • As a Medium of Exchange Azizah Isa

34. Four Main Functions of Money: • As a Medium of Exchange • As a Standard Measurement / unit of account Azizah Isa

35. Four Main Functions of Money: • As a Medium of Exchange • As a Standard Measurement / unit of account • As a Store of Value Azizah Isa

36. Four Main Functions of Money: • As a Medium of Exchange • As a Standard Measurement / unit of account • As a Store of Value • As a Standard of Deferred Payment Azizah Isa

37. 1. As a Medium of Exchange • For transactions purposes– in purchasing and selling of goods and services. • It act as an instrument – to make payment or to receive payment in the transfer of ownership. Azizah Isa

38. 2. As a Standard of Measurement • Can be used in measuring the value of goods and services in terms of its monetary value. • Have a standard monetary units (RM) – as a unit of account. For e.g. RM1, RM2, 0.50 cents 0.20 cents etc. • Comparing relative value of goods and services transacted. Azizah Isa

39. 3. As a Store of Value • For saving purposes – as a store of wealth. • Has the ability to hold its value – has the non-perishable criterion. • Can reservefor the purpose of future purchasing. Azizah Isa

40. 4. As a Standard of Deferred Payment • As a means of settling debtsmaturing in the future. • As money acts as a unit of account and store of value, it makes easier to settle debt. • Lenders make loans and buyers repay loans with money. Azizah Isa

41. Four Main Functions of Money: As long asinflation does not existin an economy, money maydoes its functions successfully. Azizah Isa

42. Four Main Functions of Money: As long asinflation does not existin an economy, money maydoes its functions successfully. It is said that, “money is what money does.” Azizah Isa

43. LETS THINK OF • WHAT MONEY CAN BUYS? Azizah Isa

44. CAN MONEY BUYS ANYTHING THAT YOU WANT? Azizah Isa

45. CAN MONEY BUY YOUR TRUE LOVE? CAN MONEY BUY YOUR FRIENDSHIP? Azizah Isa

46. LETS THINK OF WHAT ACTUALLY MONEY CAN DO FOR YOU? Azizah Isa

47. 5 minutes rest , Please ! Azizah Isa

48. Money as the Most Liquid Asset • According to the Liquidity Approach :Money is the most liquid asset. • All assets have some degree of liquidity, but some have more than others. • Indeed, money is perfectly liquid although in the real world money is not absolutely liquid. • Refer to a Simple Liquidity Spectrum. Azizah Isa

49. A Simple Liquidity Spectrum More liquid CASH(most liquid asset) CURRENT ACCOUNT OTHER BANK DEPOSITS DEPOSITS AT NON-BANKS SHORT-TERM SECURITIES LONG-TERM SECURITIES PHYSICAL ASSETS(least liquid asset) Less liquid Azizah Isa

50. Liquid Assets and Near Money • Liquid Assetsrefer to any financial instruments that can be converted into money easily. • The most liquid asset is the cash – coins and notes. Azizah Isa