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Understanding Money and Banking Basics

This document discusses money and banking concepts including: 1. Money is anything generally accepted as payment for goods/services or debts, while wealth refers to total property and income is earnings over time. 2. Money serves as a medium of exchange, unit of account, and store of value. It has evolved from commodity money to fiat money to electronic payments. 3. There are debates around whether society will become fully cashless, as predictions have not come to fruition but electronic payments are increasing. Advocates cite reduced crime and tax evasion, while critics note the risks of excluding the unbanked and technological/privacy issues. 4. Liquidity concepts include M1 (currency

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Ehab Hosny
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53 views11 pages

Understanding Money and Banking Basics

This document discusses money and banking concepts including: 1. Money is anything generally accepted as payment for goods/services or debts, while wealth refers to total property and income is earnings over time. 2. Money serves as a medium of exchange, unit of account, and store of value. It has evolved from commodity money to fiat money to electronic payments. 3. There are debates around whether society will become fully cashless, as predictions have not come to fruition but electronic payments are increasing. Advocates cite reduced crime and tax evasion, while critics note the risks of excluding the unbanked and technological/privacy issues. 4. Liquidity concepts include M1 (currency

Uploaded by

Ehab Hosny
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd

MONEY AND

BANKING 1
DR. RANIA RAMADAN
MOAWAD
Chapter 1
what is money?
Chapter 1
Meaning of Money
Money (or the “money supply”):
anything that is generally accepted in
payment for goods or services or in the
repayment of debts.
Money is different from:
Wealth: the total collection of pieces
of property that serve to store value.
Income: flow of earnings per unit of
time .
Functions of Money
1- Medium of Exchange:
– To Eliminate the trouble of finding a double
coincidence of needs (reduces transaction
costs), and
– To Promote specialization
A medium of exchange must:
– be easily standardized
– be widely accepted
– be divisible
– be easy to carry
– not deteriorate quickly
Functions of Money(cont’d)
2- Unit of Account:
– used to measure value in the economy
– reduces transaction costs
3- Store of Value:
– used to save purchasing power over time.
– other assets also serve this function
– Money is the most liquid of all assets but
loses value during inflation
Evolution of the Payments
System
1- Commodity Money: valuable, easily standardized and
divisible commodities (e.g. precious metals, cigarettes).
2- Fiat Money: paper money decreed by governments as legal
tender.
3- Checks: an instruction to your bank to transfer money from
your account
4- Electronic Payment (e.g. online bill pay).
5- E-Money (electronic money):
• Debit card
• Stored-value card (smart card)
• E-cash
Are We Headed for a
Cashless Society?
 Predictions of a cashless society have
been around for decades, but they
have not come to fruition.
 Although e-money might be more
convenient and efficient than a
payments system based on paper,
several factors work against the
disappearance of the paper system.
 Still, the use of e-money will likely still
increase in the future .
Are you with or against
cashless society?
• Advantages of a cashless society
• Reduced risk of crime. 
• Less tax evasion. A significant problem for
governments is the issue of tax evasion. Self-
employed workers such as builders can seek to be
paid in cash and therefore declare less income than
they actually earnt
• Hygiene and virus transmission.
• Quicker transactions.
Are you with or against
cashless society?
• Problems of a cashless society
• Difficult for those without bank account.
• No Privacy. the government can have access to all data
on households.
• Cash helps less spending. People with a tendency to
get into debt may purposefully decide to cut up their
cards and restrict themselves to cash payments. The
reason is that with a card, it is easier to spend money
without feeling you are overspending. 
• Potential technological failures. There is always the
risk that a digital economy is dependent on technology.
If there was a power outage or internet breakdown, the
economy would be brought to a halt. Cash is much more
adaptable in difficult times.
Measuring Money
According to the concept of liquidity we
have the following:
 M1 (most liquid assets) = currency +
traveler’s checks + demand deposits
+ other checkable deposits.
 M2 (adds to M1 other assets that are not so
liquid) = M1 + small denomination time deposits
+ savings deposits and money market deposit
accounts + money market mutual fund shares.
Table 1 Measures of the
Monetary Aggregates

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