LESSON # 1

In this lesson we shall learn…

1. What is Money?

2. What does it do?

3. Where does it come from?

4. What role does a Bank Play?

Let’s start by answering

There could be several possible answers!

IS

MONEY

IS

MONEY

MONEY IS MONEY IS

But ‘None’ Defines ‘Money’ functionally. All of these are ‘Perspectives’ and are correct.

is what Does

It is a Medium of Exchange

But everything that can

be exchanged for value

is not money

These things aren’t generally

acceptable as ‘ Medium Of Exchange’

and hence don’t qualify as ‘Money’

(anything that is

generally accepted as

payment) is more

efficient than

(trading goods/services

for goods/services)

Why isn't it a good

idea for me to try to

pay my home

electricity bill by

giving economics

lectures to people

at the power

company?

Barter requires a double coincidence of wantsYou want the good/service that the other guy has to offer,

and he wants the good/service that you have to offer

Money performs certain

Essential Functions

For anything to qualify as ‘

Money’ it must performs all

Essential Functions.

FUNCTION # 1

MEASURE

OF VALUE

Money measures the value of

various goods and services

which are produced in an

economy.

FUNCTION # 2

MEDIUM OF

EXCHANGE

Money facilitates

transactions of goods and

service as a medium of

exchange.

FUNCTION # 3

STANDARD OF

DEFERRED

PAYMENTS

Money, besides being the

basis of current

transactions, is also the

basis of deferred payments.

FUNCTION # 4

STORE OF

VALUE

Money helps people store

surplus purchasing power

and use it whenever they

want.

Given that I'm paying the power company with money,

why would it probably be a waste of time to drive

down to their office (which is 40 miles away) and pay

in cash?

Because it's

inconvenient and I

don't need to. It's

much easier to write a

check and mail it in,

or to have money

debited from my bank

account

Since the funds in your

checking account balance

are easily available for

spending (through an ATM

withdrawal, a debit card,

online bill payments, etc.),

they count as money, too.

Are the main form of money in our society

BANK DEPOSITS CASH IN CIRCULATION

BANK is a

financial

institution

that accepts

deposits

and

makes

loans.

Principles of

Money &

Banking

PRINCIPLE # ONE

PRINCIPLE # TWO

PRINCIPLE # THREE

PRINCIPLE # FOUR

PRINCIPLE # FIVE

T R I M S

Time Risk Information Market Stability