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Chapter 11: Money and the Banking System Notes by Gritchen (27/06/21) -…
Chapter 11: Money and the Banking System
Notes by Gritchen (27/06/21)
Definition
Money:
anything that is widely accepted as a medium of exchange.
set of assets in an economy that people regularly use to buy goods and services from other people.
Functions of
Money
Medium of exchange
an item that buyers give to sellers when they want to purchase goods and services.
A medium of exchange is anything that is readily acceptable as payment.
Unit of account
the yardstick people use to post prices and record debts.
Store of value
an item that people can use to transfer purchasing power from the present to the future.
Liquidity
the ease with which an asset can be converted into the economy’s medium of exchange.
Kinds of Money
Commodity money
takes the form of a commodity with intrinsic value.
E.g. Gold, silver, cigarettes.
Fiat money
used as money because of government decree
It does not have intrinsic value.
e.g. Coins, currency, check deposits.
Money in the
U.S. Economy
Currency
the paper bills and coins in the hands of the public.
Demand deposits
balances in bank accounts that depositors can access on demand by writing a check.
The Federal Reserve (Fed)
serves as the nation’s central bank
in the United States
It is designed to oversee
the banking system.
It regulates the quantity of
money in the economy.
Bank Negara Malaysia
central bank for Malaysia
-established on 26 January 1959 under
the Central Bank of Malaya Ordinance, 1958.
Objectives of Bank
Negara Malaysia (BNM)
To issue currency and keep reserves safeguarding the value of the currency
To act as a banker and financial adviser to the Government
To promote monetary stability and a sound financial structure
To promote the reliable, efficient and smooth operation of national payment and settlement systems and to ensure that the national payment and settlement systems policy is directed to the advantage of Malaysia
To influence the credit situation to the advantage of the country
In meeting these objectives, the Bank is guided by the principle that it should act only in the economic interest of the nation and without regard to profit as a primary consideration.
Goals of BNM:
To promote economic growth
To promote a high level of employment
To maintain price stability and a reasonable balance in the country's international payments position
To eradicate poverty and restructure society
BNM and the Monetary Policy
Monetary policy is conducted by the BNM.
Monetary policy is the setting of the money supply
by policymakers in the central bank
The money supply refers to the quantity
of money available in the economy.
Primary Functions of the BNM
Regulates banks to ensure they follow federal laws intended to promote safe and sound banking practices.
Acts as a banker’s bank, making loans to banks and as a lender of last resort.
Conducts monetary policy by controlling the money supply.
Open-Market Operations
Money Supply
the quantity of money available in the economy.
the primary way in which the BNM changes the money supply is through open-market operations.
The primary way in which the BNM changes the money supply is through open-market operations.
The BNM purchases and sells Malaysian government bonds.
Banks and the Money Supply
Reserves
deposits that banks have received but have not loaned out.
Fractional-reserve banking system
banks hold a fraction of the money deposited as reserves and lend out the rest.
Reserve Ratio
the fraction of deposits that banks hold as reserves.