CH2-Money

1. CH2-Money HK Certificate of Education Examination CH2-Money-SV

2. The Barter Economy • In a barter economy, without money, one good was directly exchanged for another. • Problems/Disadvantages of Barter: • lack of double coincidence of wants • very costly to find trading partners • most commodities are indivisible • transactions of less than one unit of the commodity is highly impossible CH2-Money-SV

3. The Barter Economy • no common measure of value • trades are hindered by too many exchange rates • Inconvenience CH2-Money-SV

4. Functions of Money • Money is anything that is generally accepted as a medium of exchange. • Functions of money: • As a medium of exchange • As a unit of account/a common measure of value • As a store of value CH2-Money-SV

5. Functions of Money • Functions of money: 4. As a standard of deferred payment • Future payments expressed in terms of money • ‘means’ of deferred payments  ‘standard’ of deferred payments (e,g, credit card) • As a means of payment • e.g. money, cash coupons & bank draft CH2-Money-SV

6. The Evolution of Money • Commodity money, e.g. shell, salt & metal • Problems: inconvenience & inadequate metals • Convertible paper money • Fully convertible into the same amount of gold & silver • Fiat money/Non-convertible money/Token money(i.e. coins & banknotes) CH2-Money-SV

7. The Evolution of Money • Deposit money • Demand deposits (in current account) • Savings deposits • Time/Fixed deposits (with fixed period of maturity) • Negotiable/Transferable certificate of deposits, CDs CH2-Money-SV

8. The Evolution of Money • Deposit money • Factors affecting choice of bank deposit: 1. Liquidity: degree of ease of drawing money out • With Easy Pay System & Automatic Teller Machines (ATM), savings & demand deposits become the most liquid deposits while time deposits are the most illiquid deposits. 2. Interest earning • CDs & time deposits carry higher interest rates while time deposits almost zero. 3. Certainty of earnings • CDs & time deposits guarantee the amount of interest earned while the interest rates for savings & demand deposits varies frequently CH2-Money-SV

9. The Evolution of Money • Electronic money • Certain instruments or cards (e.g. EPS card & Octopus card) used for making payments through an electronic system (e.g. ETC, Money Link, JETCO) • The amount of money billed will be directly transferred from the consumer’s account into that of the seller • As a means of payment • Making money less important in daily transactions but not leading to ‘moneyless’ society CH2-Money-SV

10. Are Credit Cards money? • As a medium of exchange? • No as it acts as a temporary medium of exchange only • As a unit of account? • No the value of commodities is never expressed in terms of credit cards • As a store of value? • No as it does not have any value or purchasing power in itself. CH2-Money-SV

11. Are Credit Cards money? • As a standard of deferred payment? • No as future payments cannot be expressed in terms of credit cards • Conclusion: • Credit cards are NOT money but are classified as money substitutes. CH2-Money-SV

12. Qualities of Good Money • Durable • Portable • Divisible • Homogeneous • Scarce or in restricted supply CH2-Money-SV

13. Currencies in Hong Kong • Notes are issued by three licensed banks (the HongKong and Shanghai Banking Corporation Ltd., the Standard Chartered Bank, and the Bank of China) & the Hong Kong Monetary Authority. • Coins are issued by the HKSAR government • Banknotes and government coins are legal tender. CH2-Money-SV

14. 1. Surrender US$1 2. Receive a Certificate of Indebtedness 3. Obtain the right to issue HK banknotes of HK$7.8 Issuing Banknotes in HK Exchange Fund Note-issuing Banks • HK’s currency system is called • Foreign Exchange Standard. CH2-Money-SV

15. Money Supply in Hong Kong • Money Supply definition M1 = currency (i.e. notes & coins) in public circulation + demand deposits with licensed banks • Money Supply definition M2 =M1 + time deposits with licensed banks + negotiable certificates of deposits issued by licensed banks & held by the non-bank public CH2-Money-SV

16. Money Supply in Hong Kong • Money Supply definition M3 =M2 + deposits with restricted licensed banks & deposit-taking companies + negotiable certificates of deposits issued by restricted licensed banks & deposit-taking companies held by the non-bank public CH2-Money-SV

17. Money Supply in Hong Kong • Money Supply definition M1 = currency (i.e. notes & coins) in public circulation + demand deposits with licensed banks • M1 emphasizes the function of medium of exchange • Money Supply definition M2 =M1 + time deposits with licensed banks + negotiable certificates of deposits issued by licensed banks & held by the non-bank public • M2 emphasizes the function of store of value CH2-Money-SV

18. Money Supply in Hong Kong • Money Supply definition M3 =M2 + deposits with restricted licensed banks & deposit-taking companies + negotiable certificates of deposits issued by restricted licensed banks & deposit-taking companies held by the non-bank public • M3 emphasizes the function of store of value CH2-Money-SV

19. Total Money Supply Definition • Total money supply definition M1 =M1(HK$) + M1(foreign currency) • Total money supply M2 =M2(HK$) + M2(foreign currency) • Total money supply M3 =M3(HK$) + M3(foreign currency) CH2-Money-SV

20. Effects of Payment by Phone Service (PPS) on Money Supply • Case 1: debit demand deposits and credit savings deposits • M1 decreases • M2 remains unchanged • M3 remains unchanged • Case 2: debit demand deposits and credit demand deposits • M1 remains unchanged • M2 remains unchanged • M3 remains unchanged CH2-Money-SV

21. Effects of Payment by Phone Service (PPS) on Money Supply • Case 3: debit saving deposits and credit savings deposits • M1 remains unchanged • M2 remains unchanged • M3 remains unchanged • Case 4: debit savings deposits and credit demand deposits • M1 increases • M2 remains unchanged • M3 remains unchanged CH2-Money-SV