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LECTURE 5

LECTURE 5. Money and Banking. What is Money?. Money is a good that is accepted as a medium of exchange in transactions. Other functions of money include: (a) Unit of account – for measuring the relative worth / value of a wide variety of goods and services.

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LECTURE 5

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  1. LECTURE 5 Money and Banking

  2. What is Money? • Money is a good that is accepted as a medium of exchange in transactions. Other functions of money include: (a) Unit of account – for measuring the relative worth / value of a wide variety of goods and services. (b) Store of value – enables people to transfer purchasing power from the present to the future.

  3. The Demand for Money • Transactions demand The need for money as a medium of exchange, to pay mortgage, bills etc. • Asset demand Storing financial assets in many forms such as corporate stocks, private or government bonds, or money.

  4. Total Demand for Money Transactions demand + Asset demand

  5. The Supply of Money • Money supply is the total amount of money available in an economy at a particular point in time. • Types of money: (a) M1 (b) M2 (c) M3

  6. M1 • Currency: Coins & Paper Money • Checkable Deposits • Institutions That Offer Checkable Deposits • A Qualification M1 = currency + checkable deposits

  7. M2 • Savings deposits, including money market deposit accounts • Small (less than RM100,000) time deposits • Money market mutual funds M2 = M1 + savings deposits + small time deposits +MMMF

  8. M3 • Large time deposits (RM100,000) or more, usually owned by businesses as certificates of deposit. M3 = M2 + large time deposits

  9. The International Monetary System • Rules and procedures by which different national currencies are exchanged for each other in world trade.

  10. What are Exchange Rates? • The exchange rate states the price, in terms of one currency, at which another currency can be bought. • There are 2 types of exchange rates: (a) Fixed exchange rate (b) Flexible exchange rate

  11. Fixed Exchange Rate • A fixed exchange rate system through which governments determine exchange rates and make necessary adjustments in their economies to maintain those rates.

  12. Flexible Exchange Rate • A flexible or floating exchange rate system through which demand and supply determine exchange rates in which no government intervention occurs.

  13. Appreciation and Depreciation • A nation’s currency is said to appreciate when exchange rates change so that a unit of its currency can buy more units of foreign currency. • Example: When the dollar price of RM rises, from USD1 = RM4.00 to USD1 = RM3.50, this means that the RM has appreciated relative to the USD (and the USD has depreciated relative to the RM).

  14. A nation’s currency is said to depreciate when exchange rates change so that a unit of its currency can buy fewer units of foreign currency. • When the dollar price of Ringgit Malaysia rises, for example, from RM3.50 = USD1 to RM4.00 = USD1, the RM has depreciated relative to the USD (and the RM has appreciated relative to the USD).

  15. What is a depreciation to one country must be an appreciation to the other.

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