3 What is Money? a store of value, A unit of account A medium of exchange”Without money you would have…………….BarterProblems with barter?Double coincidence of wants
4 Properties Of Money Liquidity Scarcity Portability Uniformity Durability
5 Kinds Of MoneyConvertible 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’
6 Commodity MoneyHas value and can be used for other purposes.
7 Inconvertible money – legal tender - Notes and Coins issued by government.
8 Bank deposits – Bank deposits Savings. Either cash or deposit accounts.
10 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?
11 Money Supply Definitions M1 cash and notes and cash accounts in banks.M2 includes M1 + deposit accounts in banksM3 (M1 +M2) cash at non-bank institutions, e.g. Insurance companies and in Pension Funds.
12 Money Supply – Quantity Theory of Money MV=PTM = MoneyV =Velocity of CirculationP = PricesT = number of transactions
13 Why have money? Transactions Demand purchases Precautionary Demand For uncertain expensesSpeculative DemandDemand affected by changes in interest rates (what will happen to the demand for money if interest rates increase?)
14 Determination of Interest Rate Supply and demand for money (if floating)In most economies it is set by the central Bank.
15 Banking Retail Banking day to day banks Wholesale Banking – commercial and investment banks
16 MAIN FUNCTIONS OF THE BANK OF ENGLAND Banker to the GovernmentManages the issue of Government DebtBanker to the Commercial BanksHolds gold and foreign-exchange reservesManages the issue of notes and coinsImplements domestic monetary policyIt sets interest rates.
17 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.