Chapter 16:- Money and banking
16.1 Money:The main form of money used in countries are coins, notes, and bank
accounts. Coins are often used to make small purchases and are given
in change. There are number of ways to transfer money from one bank
to another. These include direct debits, credit cards, and mobile
phones.
Functions of money: Medium of exchange :- Money allows people to buy and
sell products. In carrying out this function, money is said to
acta as a medium of exchange.
 Store of value :- Enabling people to exchange products is
money’s most important functions. Acting as a store of
value means that money can be saved.
 Unite of account:- This function of acting as a unit of
account , enables buyers and sellers to agree on what items
are worth, relative to each other.
 Standard of deferred payments:- This means that money
allows people to borrow and lend.
Characteristics of money: - To act as money, an item
does not need to have intrinsic value. The main types of
characteristics of money is : Durable
 Portable
 Divisible
 Homogenous
 Recognisable.
16.2 Banking
The role and importance of commercial banks:  The first function: - Enables customers to keep their money
in a safe place. Deposits can be made in two types of bank
accounts. One is current account, other is called demand
account. There is easy and immediate access to money in
this type of account.
 The second function: - Enables customers to spend more
then what is in her or his account, up to an agreed limit.
This can be relatively expensive way of borrowing and is
mainly used to cover short-term gaps between expenses
and income.
 The third function: - Enables their customers to receive and
make payments. This is referred to as acting as agent for
payments and providing money transmission services.
The aims of commercial banks: The key aim of a commercial bank is to make profit for its
shareholders. The main way it does this is by giving loans.
Another aim which can conflict with the key aim what is known
as liquidity.
Role and importance of a central banks:  Acts as a banker to the government: - Tax revenue is
given to government through central bank and payments
for goods and services is done by this account.
 Operates as a banker to the commercial banks:Holding accounts at the central bank enables commercial
banks to settle debts between each other and to draw out
cash.
 Acts as a lender of last resort: - Lend to banks who are
short of cash.
 Manages the national debts:- The total amount
government owes. Ove time, government debts tend to
build up.
 Hold the country’s reserves of foreign currency and
gold :- Keeps the gold and foreign currency for exchange
rate.
 Issues bank notes:- Central bank is responsible for printing
notes and destroying notes which are no longer suitable for
circulation.
 Implement the government monetary policy:Controlling the money supply and influencing interest rates
throughout the economy.
 Controls the banking system :- Many central banks play
key role in supervising and regulating.
 Represents the governments:- Meeting with others
central banks and international organisation such as the
world bank.
Key terms:Money: - Sn item which is generally acceptable as a means of
payments.
Commercial banks: - Banks which aim to make a profit by
providing a range of banking services to household and firms.
Liquidity: - Being able to turn an asset into cash quickly
without any loss.
Central banks :- A government owned bank which provides
banking services to the government and commercial banks and
operates monetary policies.