© 2005 Pearson Education Canada Inc. Chapter 1 Why Study Money, Banking, and Financial Markets? Barter system Money (definition, emergence, types, ) Salwa Elshorafa

1-2 How We Study Money and Banking Basic Analytic Framework 1.Simplified approach to the demand for assets 2.Concept of money and banking 3.Basic supply and demand approach to understand behavior in financial markets 4.Search for profits 5.Transactions cost and asymmetric information approach to financial structure 6.Aggregate supply and demand analysis © 2005 Pearson Education Canada Inc.

1-3 Why Study Financial Markets? 1.Channel funds from savers to investors, thereby promoting economic efficiency 2.Affect personal wealth and behavior of business firms Why Study Banking and Financial Institutions? 1.Financial Intermediation Helps get funds from savers to investors 2.Banks and Money Supply Crucial role in creation of money 3.Financial Innovation Why Study Money and Monetary Policy? 1.Influence on business cycles, inflation, and interest rates

© 2005 Pearson Education Canada Inc. 1-4 Barter The human life begins by agriculture and animal growing in order to achieve self-sufficiency, therefore,individual produces her/his own personal needs. self-sufficiency changes to economic planning where individual produce one thing or a number of things then The benefit of exchange occur The barter arouse as a form of exchange in the first stage of mans development

© 2005 Pearson Education Canada Inc. 1-5 Definition of Barter It is a process of exchanging goods and services amongst individual if it is possible. Doubtless,the barter system plays a historical and successful role when goods were limited and individual needs were non-complex It was not easy way, but it was fraught of risk. Difficult of barter system The barter system require the need to achieve harmony with the wishes of dual

© 2005 Pearson Education Canada Inc. 1-6 The accounting method acceptable to a both barter Suppose that there was a double consensus of wishes, but the person who owns cattle accept the amount of wheat which is owned by another person Certain good can not be divided Difficulties in storage of some commodities, and some of goods get damaged.

© 2005 Pearson Education Canada Inc. 1-7 Types of money The appearance of money has occurred to lower the cost of barter system 1)Commodity money As result of the difficulties of barter it has gradually developed as system,until the human knows money as a means of exchange -The dealers use “ accounting unit “ which embodied in specific entity -commodity in society different from one community to another depending on “ economic, social, cultural circumstances its called “ Accounting money “

© 2005 Pearson Education Canada Inc. 1-8 Accounting money The appearance of accounting money lead to split the process of barter in two separate time and place after it was done at the same time and place The first process is the sale of goods for money ( cash item ) The second process is the purchase of money for goods

© 2005 Pearson Education Canada Inc. 1-9 Advantage Reducing the cost Simplifying the process of trade Saving time and effort Achieving double harmony with the wishes Increasing the rate of barter Increasing income and quantity of production

© 2005 Pearson Education Canada Inc Disadvantage Use cash as mediator of consumer goods did not remain for long time for several reasons:- Non-homogeneity of the unit Indivisibility Difficulty of storage for along time ** began to be used ornamental goods such as ( contracts made of snails) as a money, people abandon them because - do not have the characteristics of a good mediator cash - Subject to break - Lose their value as ( diamonds )

© 2005 Pearson Education Canada Inc Discovering metal stage When human has discovered metal cash goods starts to enter new era of “ metallic money “ and began using the cheap metallic “ cooper, bronze, aluminum….) as a money then developed usage of precious metals which are characterized by several features: * indivisibility without loss of value * portable storage easily * homogeneity and ease of classification * relative security and the stability of supply reflects the high value * stiffness

© 2005 Pearson Education Canada Inc Coinage Precious metal have been used initially in the form of “Bulletins” and then the invention of “ coinage” which established a high development in the history of money Definition of coinage :- changing the precious metal to unified pieces with specific weight and caliber where the weight and caliber appears on the face of any piece and these pieces are called “ currency coins”

© 2005 Pearson Education Canada Inc Banknotes Its appeared in the 17 th century, where people are used to keep their currency coin and precious metal in traders and chapel who have safe place Interest Issue Paper certificate Checking paper certificate Representative money

© 2005 Pearson Education Canada Inc Representative money “ paper certificate ” its value of gold deposits is 100% With the appearance of banks the depositor make sure that paper certificate do the function of money without changing to gold by its owner The first attempt to produce banknotes issued by bank stockholm Banknotes which are issued by different banks performed the function of money The government interfere through compulsory price on banknotes

© 2005 Pearson Education Canada Inc Fiat money All banknotes in the world being legal and compulsory and individual do not have any right in the community to refrain accepting Official currency and don’t exceed the limits of the state.

© 2005 Pearson Education Canada Inc Bank money Its regarded the most modern/ developed and widespread form Bank money is specified by the under demand deposits The appearance of money was caused as a result of continuing deposits money to bank by people.