CHAPTER 10: Money & Bank

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Economics in One Lesson: The Shortest and Surest Way to Understand Basic Economics

1. Barter trade- Exchange of one good for another.

2. Problems of Barter Trade
a) Problem of exchange rate.
b) Problem of perishability.
c) Problem of portability.
d) Problem of double coincidence of wants.

3. Money- A good that acts as a medium of exchange in transactions.

4. Function of money
a) Act as an medium of exchange.
b) Unit of accounts
c) Store of value. E.g.: It can be keep in the form of cash or deposits.
d) Standard of deferred payments.

5. Qualities of money
a) Easily recognised
b) Divisibility
c) Portability
d) Durability
e) Acceptability
f) Scarcity

6. Value of money- The purchasing power money income.

7. Inflation- A situation where there is a great increase in the general price level.

8. How to measure the rate of inflation?
- Main method is using the Consumer Price Index (CPI).

9. Consumer Price Index- A statistical devices that shows changes in the general price level from the base year to the current year.

10. Base Year- A reference year that other years are compared to.

11. Steps to calculate the Consumer Price Index

a) Select a base year where there is no natural disaster that will affect the Gross National Product of the country.

b) Selection of basket of goods.

c) Price of the selected good is converted into the current year index.

d) Weightage is reflected by the consumer expenditure.

e) Multiply the current year index with the individual weight to get the weighted current year index.

12. Current year index= Current year index / Base year price X 100

Consumer price index= Sum of weighted current year index / Total weight


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Economics: A Self-Teaching Guide (Wiley Self-Teaching Guides)

13. Causes of inflation

a) Demand-pull inflation
- A reduction in taxes.
- Economic growth in other countries.
- Rising consumer confidence.
- A depreciation of the exchange rate.

b) Cost-push inflation- An increase in the costs of production with unchanged demand.
- Rising imported raw materials costs.
- High indirect taxes imposed by the government.

14. Effects of inflation
a) Cash saving will fall and this will cause the value of money will be eroded.
b) High inflation rate reduce the value of money per capita income. The standard of living will fall.
c) Balance of trade will move to a deficit state. That means the exports will become more expensive & imports will become cheaper.
d) Rising prices of the products will attract more producers to increase the production of product so the producers could employ more people.
e) Inflation will lead to greater income inequality.

15. Ways to control inflation
a) Fiscal policy- The government increase direct taxes so that the consumers will reduce consumption of goods. The government also reduce expenditure.

b) Monetary policy- By reducing the money supply, increase interest rate & this will reduce the aggregate demand.

c) Fixing a price ceiling to ensure that the price do not go beyond a certain level.

16. Banking- A financial institution that acts as a payment agent for customers, and borrows and lend money.

17. 3 principles involved in banking
a) Liquidity- The assets can be converted into cash easily without loss of value.
b) Profitability- Profit maximisation can satisfy the shareholders of a commercial bank.
c) Security- The depositors assured that their money is safe & that they can make withdrawals at any time.

18. Commercial Bank- Financial institution with the main objective of maximising profits. It is also known as joint-stock banks.

19. Functions of a commercial bank
a) Provide cheque services.
b) Providing loans to customers.
c) Providing other services like foreign exchange & remittances to overseas customers.
d) Accept saving, fixed & demand deposits from customers.


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Economics For Dummies (For Dummies (Business & Personal Finance))

20. Balanced sheet of a commercial bank- A summarised account of a bank’s total assets & liabilities.

21. Assets- The items and property owned or controlled by an individual.

22. a) Assets
·Coins & notes
· Reserves with central bank
· Bills discounted
· Investment
· Loans
· Short notices

b) Liabilities
-Capital reserves
-Deposits

23. Central Banking- The government’s bank.

24. Functions of a central bank
a) Looking after the money received by the government come from tax revenue.
b) It manages the national debts.
c) It is the bankers’ bank.
d) It will lend money to the banking system if they run out of money

25. Credit Creation- A process whereby a small increase in given deposits will lead to a greater increase in money supply in the economy.

26. Determine the increase in the money supply

Money multiplier= 1 / Liquidity ratio

27. The Stock Exchange- A market which shares are bought & sold.

28. Functions of the Stock Exchange
a) Gives people the confidence to buy shares issued by companies.
b) Allows a company to become a public limited company & raise capital through the sale of its shares.
c) Market for the purchase & sale of shares.

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