Money and banking
MONEY
Money is a medium of exchange that is widely accepted in payment for goods and services. It is typically issued by a government or central authority and is generally accepted as a standard of value. Money can take many forms, such as physical currency, digital currency, or virtual currency. It allows for the buying and selling of goods and services, as well as the storing and transfer of value
BANKING
Banking is the business of providing financial services, which include accepting deposits, making loans, and facilitating the exchange of money. Banks are financial institutions that are licensed by a government to accept deposits and make loans. They play a critical role in the economy by channeling funds from savers to borrowers and facilitating international trade. Banks provide a wide range
BARTER SYSTEM
The barter system is a method of trade in which goods and services are exchanged directly for other goods and services, without the use of money as a medium of exchange. It is one of the oldest forms of trade and predates the use of money. Bartering is still used today in certain situations, such as in remote or isolated communities, or in times of economic hardship. However, it is less common today due to the widespread use of money as a medium of exchange
PROBLEM IN BARTER SYSTEM
The barter system, in which goods and services are exchanged directly for other goods and services, can have several problems. Some of these include:
Lack of a common medium of exchange: In a barter system, it can be difficult to find someone who has what you want and wants what you have. This can lead to inefficient trade and a lack of economic growth.
Difficulty in determining the value of goods and services: In a barter system, there is no standard way to measure the value of goods and services, which can make it difficult to determine how much of one good or service should be exchanged for another.
Limited scope of trade: Without a common medium of exchange, trade is limited to only those goods and services that can be directly exchanged. This can make it difficult for specialized goods and services to be traded.
Difficulty in storing wealth: In a barter system, it is difficult to store wealth because goods and services can spoil or lose value over time. This can make it difficult to save for the future.
No possibility of credit: In a barter system, credit is not possible because there is no way to lend or borrow goods or services. This can limit economic growth
FUNCTION OF MONEY
Money serves several functions, including serving as a medium of exchange, a unit of account, and a store of value. As a medium of exchange, money is used to purchase goods and services. As a unit of account, money is used to measure the value of goods and services. As a store of value, money is used to preserve purchasing power over time. Additionally, money can act as a standard of deferred payment, and serve as a way to transfer wealth from one person to another
MONEY SUPPLY
The money supply is the total amount of money available in an economy at a specific point in time. It can be classified into different categories, such as physical currency, demand deposits (e.g. checking accounts), and time deposits (e.g. savings accounts). The money supply is typically measured by central banks and governments using different monetary aggregates, such as M0, M1, M2, and M3.
M0 is the most narrow measure of the money supply, consisting only of physical currency and coins.
M1 includes M0, as well as demand deposits.
M2 includes M1 and "near money". M2 is a broader measure of the money supply that includes savings deposits, money market securities, and other time deposits, which are less liquid and not as suitable as exchange mediums but can be quickly converted into cash or checking deposits.
M3 is the broadest measure of the money supply, including M2 as well as longer-term time deposits and institutional money market funds.
Central banks can use monetary policy to influence the money supply and interest rates in the economy. They can increase the money supply by buying government securities or making loans to banks, and decrease it by selling securities or raising reserve requirements. The money supply and interest rates have a significant impact on the economy, they can influence the level of economic activity and inflation
Commercial banks
Commercial banks are financial institutions that provide a range of services to individuals and businesses, including accepting deposits, making loans, and issuing credit cards. They are called commercial banks because they make their profit by providing these services to the general public.
Commercial banks accept deposits from individuals and businesses and pay interest on those deposits. They use those deposits to make loans to other individuals and businesses. The bank earns interest on the loans, which is how they make a profit.
Commercial banks also offer other services such as issuing credit cards, providing online and mobile banking, and foreign currency exchange. They also offer different types of accounts like savings accounts, checking accounts, and time deposits.
Commercial banks are regulated by government agencies to ensure that they operate in a safe and sound manner and comply with laws and regulations. They are also required to maintain a certain level of assets, called capital, to protect depositors' funds in case of bank failure.
In addition to traditional brick-and-mortar commercial banks, there are also online-only banks that operate solely on the internet and offer many of the same services as traditional banks, but with the convenience of online access
FUNCTION OF COMMERCIAL BANKS
The primary function of commercial banks is to accept deposits from individuals and businesses and use those deposits to make loans to other individuals and businesses. This is known as the intermediation of funds.
Commercial banks also provide a variety of other financial services to their customers, including:
Checking and savings accounts: Commercial banks offer different types of accounts, such as checking and savings accounts, to help customers manage their money and earn interest on their deposits.
Credit services: Commercial banks issue credit cards and provide other forms of credit, such as personal loans and lines of credit, to customers.
Foreign exchange services: Commercial banks can assist customers with foreign currency transactions, such as converting one currency to another.
Cash management services: Commercial banks provide services such as electronic funds transfer and direct deposit to help businesses manage their cash flow.
Investment services: Some commercial banks also provide investment services, such as offering various types of mutual funds, stocks, and bonds to customers.
Another important function of commercial banks is to act as a financial intermediary between borrowers and savers by matching up those who have money to invest with those who need to borrow money. They are also a key player in the payments system, facilitating the transfer of funds between depositors and borrowers.
Commercial banks also play a critical role in the stability of the financial system and the economy by keeping a portion of their assets as reserves and by being subject to prudential regulation and supervision by central banks and other regulatory authorities
CENTRAL BANK AND ITS FUNCTION
A central bank is a financial institution that is responsible for managing a country's monetary policy and providing financial services to the government. The main objectives of a central bank are to stabilize prices, promote economic growth, and maintain financial stability.
Central banks have several key functions, including:
Banking supervision: Central banks are responsible for supervising commercial banks and other financial institutions to ensure that they operate in a safe and sound manner and comply with laws and regulations.
Financial services to the government: Central banks provide financial services to the government, such as issuing government bonds, managing public debt, and acting as a lender of last resort.
Foreign exchange: Central banks manage the country's foreign exchange reserves and intervene in the foreign exchange market to stabilize the exchange rate.
Payment systems: Central banks play a key role in the payments system by facilitating the clearing and settlement of financial transactions.
The most famous central bank is the Federal Reserve (Fed) in the United States, the European Central Bank (ECB) in the European Union and the Bank of Japan (BOJ) in Japan.
Central banks are generally independent of the government, which means that they are not beholden to political influences when making monetary policy decisions. This independence allows them to make decisions that are in the best interest of the economy, rather than being swayed by short-term political considerations
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