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LECTURE 02 IBFT 05204.pdf

  2. Module’s Outline ▪ Up to the end of this lecture a student should be able to explain the following: ✓The definition of money ✓Definition of inflation ✓Common effects of inflation ✓Types of money ✓Types of inflation ✓Historical examples of inflation 2/26/2023 MR. THABITI 2
  3. Concept of Money ❖Although we typically think of “money” as coins and paper currency or funds in checking accounts. In fact, economists have a very general definition of money: ➢Money is anything that people are willing to accept in payment for goods and services or to pay off debts. ➢money supply is the total quantity of money in the economy. 2/26/2023 MR. THABITI 3
  4. What Is Money ? ▪ Money; refers to the any thing that is generally accepted as payment for goods and services or in the settlement of debts ▪ Using money allows buyers and sellers to pay less in transaction costs compared to barter trading . 2/26/2023 MR. THABITI 4
  5. Features Of Money i. Acceptable: This means that every one must be able to accept the money for transactions without any hesitations ii. Durable: money should be durable enough to retain its usefulness for many, future exchanges . iii. Divisible: This means that money can be divided into small units that can be used for exchange for goods and services 2/26/2023 MR. THABITI 5
  6. Features Of Money iv. Uniformity: This means that all types of the same denomination must have the same purchasing power v. Portable: This means that money should be easy to be carried from one place to another place for transaction vi. Limited supply: For the money to retain its worth there must be a limited supply .The more the money in circulation the less it is valued. 2/26/2023 MR. THABITI 6
  7. Key Functions Of Money ❑ Money serves four key functions in the economy which are as follows; I. It acts as medium of exchange II. It is a unit of account III. It acts as a store of value IV. It offers a standard of differed payment 2/26/2023 MR. THABITI 7
  8. Types Of Money 1) Commodity money 2) Metallic money 3) Paper money 4) Credit money 5) Plastic money 6) Electronic money 2/26/2023 MR. THABITI 8
  9. Commodity money ➢Was the first type of money which was used during the earliest period of human civilization ➢any commodity that was generally demanded and accepted was chosen and used as money 2/26/2023 MR. THABITI 9
  10. Metallic money ➢ Is the form of money in form of metals like gold ,silver and copper which were used in early period of human civilization. 2/26/2023 MR. THABITI 10
  11. Paper money It was found inconvenient as well as dangerous to carry gold and silver coins from place to place. so the invention of paper money marked a very important stage in the development of money. ➢Is a country’s official paper currency that is circulated for transactions involved in acquiring goods and services. 2/26/2023 MR. THABITI 11
  12. Credit money ▪ Is the form of money is the monetary value created as the result of some future obligations or claim. ▪ Credit money emerges from the extension of credit or issuance of debt. ▪ The cheque (credit money or bank money) its self is not money but it performs the same functions as money. 2/26/2023 MR. THABITI 12
  13. Legal tender money ➢This is the form of money which accepted only within a country to facilitate day to day transactions and not outside the country except when exchanged new legal tender. 2/26/2023 MR. THABITI 13
  14. Plastic money ➢Is the money inform of credit cards (visa cards, Mastercard) and debit cards .It aims on reducing the needs for cash to make transactions ➢Credit card is a small plastic card issued by a bank or business owner allowing the holder to purchase goods or services on credit. 2/26/2023 MR. THABITI 14
  15. Electronic money ➢Electronic money (e-money) refers to the money that is exists in banking computer systems that may be used to facilitate electronic transactions. ➢The value of electronic money maybe backed by fiat currency and be exchanged into physical, tangible form ➢Example of electronic money method is PayPal. 2/26/2023 MR. THABITI 15
  16. NB. ❑Digital currency ,and crypto currency are other modernized form of money used in transactions especially via the internet 2/26/2023 MR. THABITI 16
  17. INFLATION 2/26/2023 MR. THABITI 17
  18. What Is Inflation ? 2/26/2023 MR. THABITI 18
  19. Definition Of Inflation ▪ Inflation rate is the percentage change in the overall level of prices from one year to the next. ▪ Is the persistent increase in prices of commodities and services and decline of purchasing power of currencies . ▪ Is a rise in prices of goods and services due to the decline of purchasing power of currencies 2/26/2023 MR. THABITI 19
  20. Deflation ▪ Is the contrast of inflation which means, the decline of prices of goods and services relative to the increase in purchasing power of currencies ▪ Both inflation and deflation are expressed in percentage. 2/26/2023 MR. THABITI 20
  21. How is inflation ? “We used to go to the stores with money in our pockets and come back with food in our baskets. Now we go with money in baskets and return with food in our pockets. Everything is scarce except money” 2/26/2023 MR. THABITI 21
  22. Types Of Inflation ▪ Inflation has been categorized into three categories which are: 1) Low inflation 2) Galloping inflation 3) Hyper inflation 2/26/2023 MR. THABITI 22
  23. Low inflation oIt can be defined as single-digit annual inflation rate characterized by slow rise and predictable prices. 2/26/2023 MR. THABITI 23
  24. Characteristics of Low Inflation 1) People trust money because it retains its value from month to month and year to year. 2) willing to write long-term contracts in money terms because they are confident that the relative prices of goods they buy and sell will not get too far out of line. 2/26/2023 MR. THABITI 24
  25. Galloping Inflation oThis is inflation rate in the double-digit or triple-digit range of 20, 100, or 200 percent per year . oGalloping inflation is relatively common in countries suffering from weak governments, war, or revolution. 2/26/2023 MR. THABITI 25
  26. Characteristics of Galloping Inflation Rate 1) Most contracts get signed to a price of a foreign currency like the dollar. 2) Money loses its value very quickly. 3) Financial markets wither away, as capital flees abroad. 4) People hoard goods, buy houses, and never, ever lend money at low nominal interest rates. 2/26/2023 MR. THABITI 26
  27. Hyperinflation oA third and deadly kind of inflation in which prices are rising a million or even a trillion percent per year. ▪ The most documented case of hyperinflation took place in the Weimar Republic of Germany in the 1920s when the government decided to print huge amount of currency to finance deficit due to the low tax collection. 2/26/2023 MR. THABITI 27
  28. Features of hyperinflation 1) The real money stock falls drastically. 2) Decreasing the real money demand. 3) Increasing the spend of money. People were seen running from store to store, dumping their money like hot potatoes before they get burned by money’s loss of value. 4) Relative prices become highly unstable. 2/26/2023 MR. THABITI 28
  29. Causes Of Inflation ❖An increase in the supply of money is the root of inflation. oA country’s money supply can be increased by monetary authorities through: i. Printing and giving away more money to citizens. ii. Legally devaluing the legal tender currency. iii. Loaning new money into existence. 2/26/2023 MR. THABITI 29
  30. Causes Of Inflation oIn order to get deep understanding about the real causative agents of inflation we must describe the modern inflation theories which are: a. Demand pull b. Cost-push (stagflation) c. Built-in 2/26/2023 MR. THABITI 30
  31. A: demand pull effect ▪ Demand pull inflation occurs when an increase in the supply of money and credit stimulates the overall demand for goods and services to increase rapidly than economy’s production capacity. ▪ When people have more money, spend more and increases the demand under the constant supply ▪ The increase in demand leads the increase in prices and hence inflation rises. 2/26/2023 MR. THABITI 31
  32. B: Cost Push Effect ▪ Cost push inflation is a result of the increase in prices of production inputs which leads higher cost of finished products or services. ▪ In order to generate profit a producer charges high price so as to compensate the cost of production and hence inflation occurs. 2/26/2023 MR. THABITI 32
  33. C: Built-in inflation ▪ This is the result of adaptive expectation or idea that people expect current inflation rate to continue in the future. ▪ As such, workers may demand more wages to maintain their standard of living. ▪ Their increased wages results in a higher cost of goods and services and induces each other. 2/26/2023 MR. THABITI 33
  34. PROS & CONS OF INFLATION ▪ Inflation can termed as good or bad depending to the upon which side one takes and how rapidly the change will take. 2/26/2023 MR. THABITI 34
  35. Pros Of Inflation i. It bring about higher price and profit to sellers ii. It enhance speculation and higher return iii. It boost economic activities due to high level of spending iv. It leads to higher resale value of assets v. It encourage spending 2/26/2023 MR. THABITI 35
  36. Cons of inflation i. It leads to the higher and unaffordable prices to some people ii. It induce a tendence of uncertainty in the economy iii. It increases cost in economy for researching, estimating and adjusting the economic condition 2/26/2023 MR. THABITI 36
  37. Historical Examples Of Inflation ▪ The most famous example is hyperinflation that struck the German Weimar republic in the early of 1920s. ▪ The nations that were the victorious in world war I demanded reparations from Germany, which could not be paid in German paper currency as this was of suspect value due to government borrowing. ▪ German attempted to print paper notes, buy foreign currency with them and use that to pay their debts. 2/26/2023 MR. THABITI 37
  38. Cont.… ▪ This policy led to the rapid devaluation of the German mark. ▪ More and more money flooded the economy and its value declined up to the point where people would paper their walls . ▪ Similar situations occurred in Peru in 1990 and in Zimbabwe between 2007 and 2008. 2/26/2023 MR. THABITI 38
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