DEFINITIONS CH 16- Money and Banking Flashcards
Money
Money: item which is generally acceptable as a means of payment (Eg. Coins, notes, bank accounts)
Commercial banks
Commercial banks: banks which aim to make profit by providing a rage of banking services to households and firms
Banks enable their customers to make payments using credit cards, standing orders, direct debits and online banking.
Commercial banks accept deposits to lend and to enable customers to make payments. Accepting deposites allows customers to keep their money in a safe place. Deposits can be made into a current account, which is an account that allows immediate and easy access to money held, but usually gives no inetrest. Deposits can also be made in a deposit account where a period of notice must be goven before money can be withdrawn, and interest is paid on money deposited.
Banks act as financial intermediaries by borrowing and lending to their customers
Commercial banks make profit by charging a higher rate of interest to their borrowers than to the people who save their money with them
Liquidity
Liquidity: being able to turn an asset into cash quickly without a loss
Central bank
Central bank: government-owned bank which provides banking services to the government and commercial banks and operates monetary policy
Monetary Policy
Monetary Policy: Monetary policy is a set of tools that a nation’s central bank has available to promote sustainable economic growth by controlling the overall supply of money that is available to the nation’s banks, its consumers, and its businesses.
Forms of Money
The main forms of money are coins, notes and bank accounts
Coins are used to make small purchases and are used as change.
Notes are used to buy more expensive items.
Bank accounts are the main form of money in most countries. 3 methods to transfer money from one bank account to another(direct debits, credit cards, mobile phones). Bank accounts are not legal tender whereas coins and bank notes are.
legal tender is any form of payment that has to be accepted in a settlement of debt.
Functions of Money
Money has 4 functions:
Medium of exchange (money can be exchanged for products and products can be exchanged for money)
Store of value (money can be saved and doesnt deteriorate with time)
Unit of account (Money can be used to place a value on an item)
Standard of deffered payments (money can be used to lend and borrow)
Characteristics of Money
Money doesnt need to have an intrinsic value (Eg: gold has many uses such as jewellery, micro chips etc. But the US dollar has no value other than being money)
Money should be generally acceptable
Money has to be limited in supply in order to have value
Money must be durable
Money must be portable
Money must be divisible
Money must be homogeneuos(all notes and coind of the same value must be exactly the same)
Money must be recognizable
Borrowing From Commercial Banks
There are 2 ways to borrow from commercial banks, overdraft and loans. Overdraft enables customers to spend more than what is in their account up to an agreed limit. Interest will be charged on teh amount borrowed. It is an expensive way of borrowing and is ususally used for short term gaps between expenses and income.
The second method is to take a loan for a specific amount that must be repaid in a specific time period. There is an interest charged on the loan but the rate is much lower than that on an overdraft. Banks also take insurance called collateral which include some of the borrowers assets. These assets are sold to pay off the loan in the case that the borrower is unable to pay it back.
Other Functions of Commercial Banks
Change foreign currency
Safeguarding of small valuables and important documents
Aid in the administeration of a customer’s will
Providing advice on a numerous financial matters
Offer insurance and savings accounts
Some offer mortgage loans
Aims of Commercial Banks
Their main aim is to make a profit for their shareholders. They do this by giving loans at a higher interest rate than they give to those who deposit money with them. Another major aim of theirs is liquidity. Banks have to ensure that they can keep up with requests to withdraw money, due to this, they keep a certain amount of liquid assets. These are items that can be converted to cash without causing loss. Banks have to balance profitability and liquidity
Role and Importance of Central Banks
Acts as a banker to the government and commercial banks
Acts as a lender of last resort
Manages the national debt
Holds the country’s reserves of foreign currency and gold
Issues bank notes
Implements the government’s monetary policy
Controls the banking system
Represents the government
Independance of Central Banks
Central banks are given the authority to decide the interest rates by their respective governments but the governments still decide the aims of the central banks and give them a target for inflation. Unlike the government, central banks wont be tempted to decrease interest rates to gain public approval thereby putting the country’s best interests first. They also have extensive knowledge of the banking system and the appropriate rate of interest that should be set
