Money , Banking, & Monetary Policy

8/2/2019 Money , Banking, & Monetary Policy

http://slidepdf.com/reader/full/money-banking-monetary-policy 1/31

MONEY , BANKING, &

MONETARY POLICY

http://images.google.com.my/imgres?imgurl=http://www.malaysia.or.kr/national/p16_10a.jpg&imgrefurl=http://www.malaysia.or.kr/symbols.htm&h=265&w=263&sz=16&tbnid=HmmrFNHJW4EJ:&tbnh=107&tbnw=107&start=2&prev=/images%3Fq%3DBANK%2BNEGARA%2BMALAYSIA%26hl%3Den%26lr%3D

http://images.google.com.my/imgres?imgurl=http://currency.myrice.com/papanmoney/Malaysia/MalaysiaP33-500Ringgit-(1989)-donatedth_b.jpg&imgrefurl=http://currency.myrice.com/papanmoney/_HTM/Malaysia.htm&h=159&w=300&sz=8&tbnid=U-CED91s7SEJ:&tbnh=58&tbnw=109&start=30&prev=/images%3Fq%3Dmalaysia%2Bcurrency%26start%3D20%26hl%3Den%26lr%3D%26sa%3DN

http://images.google.com.my/imgres?imgurl=http://www.filatelic.com/NOTES/MYR1-2003a.jpg&imgrefurl=http://www.filatelic.com/terms.html&h=341&w=619&sz=52&tbnid=TwHQm0M4qWwJ:&tbnh=73&tbnw=132&start=10&prev=/images%3Fq%3Dmalaysia%2Bcurrency%26hl%3Den%26lr%3D

http://images.google.com.my/imgres?imgurl=http://news.bbc.co.uk/media/images/38575000/jpg/_38575299_ringgit-300.jpg&imgrefurl=http://news.bbc.co.uk/2/hi/business/2564557.stm&h=180&w=300&sz=15&tbnid=532yATZ7X7EJ:&tbnh=66&tbnw=110&start=18&prev=/images%3Fq%3Dmalaysia%2Bcurrency%26hl%3Den%26lr%3D

http://images.google.com.my/imgres?imgurl=http://raymond79.tripod.com/money.jpg&imgrefurl=http://raymond79.tripod.com/biz.htm&h=150&w=168&sz=10&tbnid=xlrFXfTUwUoJ:&tbnh=83&tbnw=92&start=33&prev=/images%3Fq%3Dmalaysia%2Bcurrency%26start%3D20%26hl%3Den%26lr%3D%26sa%3DN



An Overview of Money

Money is anything that is generally

accepted as a medium of exchange.

The sets of assets in an economythat people regularly use to buygoods and services from otherpeople.

• Money is not income, and money is not wealth. Money is:

• a means of payment / medium of exchange

• a store of value

• a unit of account



What is Money?

Barter is the direct exchange of goods

and services for other goods and

services.

A barter system requires a double

coincidence of wants for trade to take

place. Money eliminates this problem.

As a medium of exchange, or means of

payment, money is generally accepted

by buyers and sellers as payment for

goods and services.



What is Money?

As a store of value, money

serves as an asset that can beused to transport purchasing

power from one time period

to another.



What is Money?

As a unit of account, money

is a standard that provides aconsistent way of quoting

prices.



What is Money?

Money is easily portable, and

easily exchanged for goods at

all times.

The liquidity property of

money makes money a good

medium of exchange as wellas a store of value.



Characteristics of MONEY

Acceptability -- people must be willing to

accept it as a means of payment and in

settlement of a debtDurability -- must last a reasonable length of

time before deteriorating

Divisibility-- to function as money

an assetmust be capable of division into smaller units to

accommodate transactions of differing value



Portability / Convenience -- to function as money an assetmust be portable and easy to use, it must be light, small to

carry around and easy to transfer ownership Uniformity -- money of the same value must be of uniform

quality

Stability of Value -- in order to fulfil its various functions

(especially as a store of wealth and as a means of evaluating future payment), it must retain its value

Hard for Individuals to Produce Themselves -- it mustbe hard to forge

Characteristics of MONEY



FORMS of MONEY

· Commodity Money – money that takes the form of a

commodity with intrinsic value. Something that performs

the function of money and also has alternative, non-

monetary uses, e.g., gold, silver, cigarettes. For hundreds of years gold could be used directly to buy things, but it also

had other uses ranging from jewelry to dental fillings.

Fiat Money/token money -- money without intrinsic

value that is used as money because of governmentdecree. Something that serves as money but has no other

important uses, e.g., Coins, currency and checkable deposits

(current account)



Definition of Money Supply

(M1, M2 and M3)

· Definition of Money Supply:

the quantity of money available in the

economy

Definition of Monetary Policy:

the setting of the money supply bypolicymakers in the central bank



M1 – the narrowest definition of money supply, consists of currency outside banks plus checking accounts plus

traveler’s checks Currency held outside banks – includes coins and paper

money in the hands of public

Checking accounts – balances can be withdrawn by usingcheck

Traveler’s check – issued in specific denominations, theseare treated as cash

M1 = currency held outside banks + checking accounts +traveler’s check


(M1, M2 and M3)



M2 – A broader definition of money supply, it

includes all of the components of M1 plus time

deposits and savings depositsTime deposits (fixed deposits) – interest-earning

deposits with a specified maturity, which aresubject to penalty for early withdrawal

* Savings deposits – interest-earning deposits with

no specific maturity

* M2 = M1 + time deposits + saving deposits


(M1, M2 and M3)



M3 = M2 + deposits with non-bankfinancial institution (e.g., deposits of

finance companies and post office saving)


(M1, M2 and M3)



CREDIT CARD ???

is not a form of money; when a person

uses a credit card, he or she is simplydeferring payment for the item

serves as a temporary medium of

exchange but not a store of value



Central bank :

* an institution designed to oversee the banking system and regulate the

quantity of money in the economy

Financial institution :

* privately owned institutions that serve the general public * intermediaries that stand between savers from whom they accept deposits ;

and investors to whom they make loans

BANKING

Structure of Banking System



1. Banker to commercial banks (banker’s

bank)2. Banker for the government

3. Controller of money supply

4. Lender of last resort

5. Others

Functions of Bank Negara Malaysia



To explore a process on how banks create money.

To understand this process, you need to be familiar with some basic

principles of accounting.

Assets are things a firm owns that are worth something. Most important

among a bank’s assets are its loans.

A firm’s liabilities are its debts-what it owes. A bank’s most important

liabilities are its deposits.

deposits in banks are considered as liability in banks’ balance sheet

as deposits are held in banks, the behaviour of banks can influence the

quantity of deposits in the economy, and therefore, the money supply

Credit Creation



Definition of Reserves:

deposits that banks have received but have notloaned out.

Assumption:

* currency is the only form of money

* total quantity of currency is RM100, and therefore* the supply of money is RM100

Credit Creation

Simple Case of 100-Percent-Reserve Banking



the bank will keep the deposits until the depositor comes to withdraw

or write a check against his balances

therefore, all deposits are held as reserves 100-percent-reservebanking

Credit CreationSimple Case of 100-Percent-Reserve Banking

Assets RM Liabilities RMReserves 100 Deposits 100

FIRST NATIONAL BANK



Definition of fractional reserve banking: a banking system in which banks hold only a fraction of deposits as

reserves

Definition of Reserve Ratio: the fraction of deposits that banks hold as reserves

bank reserves consist of cash in the bank plus its deposits at

central bank (BNM)

The required reserve ratio is the ratio of reserves to deposit

that banks are required , by law , to holdA bank’s required reserve = deposits x required reserve

ratio

Therefore, actual reserves - required reserves = excessreserves

Money Creation

Fractional-Reserve Banking



If the required reserve ratio is 20%, the bank

has excess reserves of $80. With $80 of excess

reserves, the bank can have up to $400 of

additional deposits. The $100 in reserves plus$400 in loans equal $500 in deposits.

Balance Sheets of a Bank in a Single-Bank Economy

In Panel 2, there is an initial deposit of $100. In Panel 3, the bank has made loans of $400.

Panel 1 Panel 2 Panel 3

ASSETS LIABILITIES ASSETS LIABILITIES ASSETS LIABILITIES

Reserves 0 0 Deposits Reserves 100 100 Deposits Reserves 100 500 Deposits

Loans 400

Money Creation




The Creation of Money When There Are Many Banks

Panel 1 Panel 2 Panel 3

ASSETS LIABILITIE

S

ASSETS LIABILITIE

S

ASSETS LIABILITI

ES

Reserves 100 100 Deposits Reserves 100

Loans 80

180 Deposits Reserves 20

Loans 80

100 Deposits

Reserves 80 80 Deposits Reserves 80

Loans 64

144 Deposits Reserves 16

Loans 64

80 Deposits

Reserves 64 64 Deposits Reserves 64 115.20 Deposits Reserves 12.80 64 Deposits

.00500Total

.

.

.

.

.

.

.2051Bank 464Bank 380Bank 2

100Bank 1DepositsSummary:

Money Creation




The Money Multiplier

Money multiplier =1

Required reserve ratio

.00500Total

.

.

.

.

.

.

.2051Bank 464Bank 3

80Bank 2

100Bank 1DepositsSummary:

The money multiplier is the multiple

by which deposits can increase for

every dollar increase in reserves.

• In the example above, the required reserve ratiois 20%. Each dollar increase in reserves couldcause an increase in deposits of $5 when there isno leakage out of the system. An additional $100of reserves result in additional deposits of $500.



MONETARY POLICY Definition of Monetary Policy:

the setting of the money supply by policymakers

in the central bank.

The mechanics of monetary policy include all themeasures which influence

the supply of money the price of money (the rate of interest)



2 types of monetary policy* contractionary, restrictive or tight monetary policy

* expansionary or cheap monetary policy

Aims of monetary policy* to maintain stability of domestic prices

* fluctuating prices will cause disturbances in economy

* to achieve higher rates of economic growth

* to eliminate fluctuations in productions andemployment

* if demand is too low, workers will be retrenched;

unemployment will occur

* To achieve full employment of resources

MONETARY POLICY



MONETARY POLICY

Tools of Monetary Control Quantitative tools - includes the required reserve ratio,

the discount rate and open market operations where the

central bank can estimate what amount of money supplywill be affected.

1. Open-Market Operation (OMO)

Definition of Open Market Operations: thepurchase and sale of government securities in financial

market so as to influence the size of bank deposits.

Government has authorized the BNM to buy and sell

government securities.



2. Reserve Requirementsregulations on the minimum amount of reserves that

banks must hold against deposits

MONETARY POLICY

Tools of Monetary Control

* an increase in reserve requirements means that

* - banks must hold more reserves and- can loan out less of each RM that is deposited

* as a result, it raises the reserve ratio, lowers the money multiplier, and decrease the money supply

* a decrease in reserve requirements means that

* lowers the reserve ratio banks hold less reserves

* have excess reserves to be lent out

* * as a result, it raises the money multiplier and increases the money supply



MONETARY POLICY

Tools of Monetary Control if r = 20% and original deposit RM1,000, then

money supply = 1/r @ RM1,000 = RM5,000

money created = RM4,000 (money supply-original deposit)

iif r = 50% and original deposit RM1,000, then money supply = RM2,000; money created = RM1,000

There is an inverse relationship between the required

reserve ratio and the money supply



MONETARY POLICY

Tools of Monetary Control 3. Discount Rate

Banks may borrow from BNM

The interest rate on the loans that BNM makes to banks is called• the discount rate

a bank borrows from BNM when it has too few reserves to meet• reserve requirements

this might occur because the bank made too many loans or it has experienced recent withdrawals

therefore, the banking system has more reserves and this allow to• create more money

BNM can alter the money supply by changing the discount rate



MONETARY POLICY


4. Funding

term given to the conversion of short term loans to medium term loans or longterm loans

objective to lengthen the payment so that the bank cannot createmultiple credits

5. Special Deposits

· commercial banks are sometimes required to deposit in the central bank an additional percentage of their deposits however, this tool is not used inMalaysia



MONETARY POLICY


Qualitative tools

Selective Credit Control

Moral suasion

Special directives

Interest rate policy

Mortgage control

Money , Banking, & Monetary Policy

Documents

Transcript of Money , Banking, & Monetary Policy