Money

1. ECONOMICS
GROUP 1
PRESENTATION

2. MONEY
• What is money?
• Money is regarded as any object
which is generally accepted in
exchange of goods and services.
• Money is said to be the most
liquid assets among all the assets
of a man.
• Liquidity refers to the ease in
which an asset can be converted
into ready cash.

3. Definitions of Money
The definitions of money vary by country but generally include at least
a measure for narrow money and one for broad money.
• M1-consist of notes & coins in circulation plus demand deposit(
plastic money) deposits.
• M2-includes M1 plus savings deposits, know as broad money.
• M3-Includes M2 plus other financial components which are relatively
less liquid and money market funds like mutual funds, repurchase
agreements, commercial papers, etc.

4. Characteristics/Attributes
of money
1. Acceptability – good money should have the quality of general
acceptability. This means every person must accept it for the
settlement of payments. It should be accepted for purchase and
sale of goods.
2. Stability- value of money should remain stable. If value of money is
changing or fluctuating day by day than it would not be considered
reliable.
3. Durability-the material used in making money should be durable
and long lasting. Coins do not wear quickly, so the quality of money
remains stable.
4. Divisibility-means ability to divide into small units without losing its
value. Good money should be divisible .
5. Homogeneity- means the money should be identical. So that there
is no ambiguity to the holder of money
6. Recognizable –the money should be easily recognized so that the
holder of money may not confuse about the value of money.
7. Portability- money should be easy to carry around. It should be very
easy to transport large sums of money.

5. FUNCTIONS OF MONEY
i. Medium of Exchange -Something that is generally accepted as payment for goods,
service, and resources. It is used to determined value during the exchange of goods
and service.
ii. A store of value/ Wealth- money commands purchasing power in that it can be used
to buy other commodities and assets It also keeps its value in you decide to hold on
to or store it instead of spending it i.e.. Allows for saving, or storing wealth for future
use, and permits credit, or delayed payments.
iii. A unit of Account –Money is a unit of account. It is used to compare the values /the
price of goods and services. We need a common measure of the cost of various
goods and services to be able to decide how best income is spent.

6. SUPPLY OF MONEY
• The money supply refers to the amount of cash or
currency circulating in an economy . The money
supply roughly includes both cash and deposits
that can be used almost as easily as cash.
• A rise in the money supply will reveal its effect by
decreased interest rates and price values of
commodities and services. Whereas a decrease in
money supply will result in increased interest
rates, price values with a coupled increase in
banks' reserves.
• As the price levels lower due to increased money
supply, the production in business will increase to
accommodate people's increased spending.

7. DEMAND OF MONEY
• It refers to the amount of cash balance people wish to hold rather than liquid assets that yield income as bond or government securities. Liquidity preference(
why people prefer to hold money).
• The demand for money is affected by several factors, including the level of income, interest rates, and inflation as well as uncertainty about the future.
• The way in which these factors affect money demand is usually explained with the theories of money demand by Keynesian views on his three
motives of holding money :- a) Transactions
b) Precautionary
c) Speculative
Transactions
• The transactions motive for demanding money arises from the fact that most transactions of our day to day involves an exchange of money. Because it
is necessary to have money available for transactions, money will be demanded. The total number of transactions made in an economy tends to
increase over time as income rises. Hence, as income or GDP rises, the transactions demand for money also rises.
Precautionary
• It refers to the desire to keep some liquid funds (money) to meet some unforeseen emergence such accidents that may arise unexpectedly, medical
bills, car repair and so on.
Speculative
• Some people choose to keep ready money to take advantage of opportunity to invest in bonds or other forms of assets. The opportunity cost of
holding money is the interest rate that can be earned by lending or investing one's money holdings. The speculative motive for demanding money
arises in situations where holding money is perceived to be less risky than the alternative of lending the money or investing it in some other asset.

8. Real and Nominal balance
Real money demand
• Is the amount demanded at a constant price level i.e. the number of units
of the purchasing power the public wants to hold.
• Real money is derived by dividing nominal quantity money demand by the
price level.
Real money demand = Nominal money
Price level
Nominal money demand
This varies with price level. There’s a loss when price increases. So people
turns to hold less money due inflation which leads to less purchasing power
of the money.

9. Determinants of money demand
Interest Rate
When interest rates are high people will spend their money t buy
interest bearing financial assets. This represent a decrease in the
quantity of money demanded therefore, resulting in the movement of
demand curve downwards sloping.
Real GDP-
Price level-

10. Money Equilibrium
• It occurs when the demand for money equals to supply of money.
• The money supply is vertical because it is established by central bank
and hence determine independently of the interest rate.

11. Monetary Policy
• Monetary policy is a set of tools used by a nation's central
bank to control the overall money supply and promote economic
growth and employ strategies such as revising interest rates
and changing bank reserve requirements.
• The aims of the monetary policy are:-
a)To maintain low level of inflation and prices stability.
b)Full employment.
c)Balance of payment equilibrium.
d)Exchange rate stability.

12. Instruments
of Monetary
policy
• Open Market Operations – involves the
purchase and sale of government papers. To
expand money supply, the government buys
treasury bonds and pays for them with new
money, whilst to reduce it, it sells treasury bonds
and receives existing money which it can
destroy.
• Reserve Requirements – this is the amount of
money that banks are supposed to lodge with the
central bank. This directly affects money supply
in an economy.
• Discount Rate – is the rate at which the central
bank charges to member banks who need to
replenish their reserves.