Other Forms Of Payments-Money and Banking-Handouts, Lecture notes of Banking and Finance

Download Other Forms Of Payments-Money and Banking-Handouts and more Lecture notes Banking and Finance in PDF only on Docsity! Money & Banking – MGT411 VU Lesson 4 OTHER FORMS OF PAYMENTS Debit Card The money in your account is used for payments Works like a cheque and there is usually a fee for the transaction Credit card It is a promise by a bank to lend the cardholder money with which to make purchases. When the card is used to buy merchandise the seller receives payment immediately The money that is used for payment does not belong to the buyer Rather, the bank makes the payment, creating a loan that the buyer must repay. So, they do not represent money; rather, they represent access to someone else’s money Electronic Funds Transfer Move funds directly from one account to another. Banks use these transfers to handle transactions among themselves Individuals may be familiar with such transfers through direct deposit of their paycheques and the payment of their utility bills, etc E-money Used for purchases on the Internet. You open an account by transferring funds to the issuer of the e-money When shopping online, instruct the issuer to send your e-money to the merchant It is really a form of private money. Stored-value card Retail businesses are experimenting with new forms of electronic payment Prepaid cellular cards, Internet scratch cards, calling cards etc The Future of Money The time is rapidly approaching when safe and secure systems for payment will use virtually no money at all We will also likely see Fewer “varieties” of currency, (a sort of standardization of money) and A dramatic reduction in the number of units of account Money as a store of value is clearly on the way out as many financial instruments have become highly liquid. Measuring Money Different Definitions of money based upon degree of liquidity. Federal Reserve System defines monetary aggregates. Changes in the amount of money in the economy are related to changes in interest rates, economic growth, and most important, inflation. Inflation is a sustained rise in the general price level With inflation you need more money to buy the same basket of goods because it costs more. Inflation makes money less valuable The primary cause of inflation is the issuance of too much money Because money growth is related to inflation we need to be able to measure how much money is circulating Money as a means of payments We measure the quantity of money as the quantity of currency in circulation – an unrealistically limited measure, since there are other ways of payments Alternatively, broadly categorize financial assets and sort them by the degree of liquidity Sort them by the ease with which they can be converted into a means of payments Arrange them from most liquid to least liquid Draw a line and include everything on one side of the line in the measure of the money © Copyright Virtual University of Pakistan 9 docsity.com Money & Banking – MGT411 VU Where to draw the line? In reality, we draw line at different places and compute several measures of money called the monetary aggregates M1, M2, and M3 M1 is the narrowest definition of money and includes only currency and various deposit accounts on which people can write Cheques. Currency in the hands of the public, Traveler’s Cheques, Demand deposits and Other chequeable deposits M2 includes everything that is in M1 plus assets that cannot be used directly as a means of payment and are difficult to turn into currency quickly, Small-denomination time deposits, Money market deposit accounts, Money market mutual fund shares M2 is the most commonly quoted monetary aggregate since its movements are most closely related to interest rate and economic growth. M3 adds to M2 other assets that are important to large institutions Large-denomination time deposits, Institutional money market mutual fund shares, Repurchase agreements and Eurodollars _Symbol Assets included C Currency M1 C + demand deposits, travelers’ Cheques, other chequeable deposits M2 M1 + small time deposits, savings deposits, money market mutual funds, money market deposit accounts M3 M2 + large time deposits, repurchase agreements, institutional money market mutual fund balances © Copyright Virtual University of Pakistan 10 docsity.com Money & Banking – MGT411 VU Example: The basket contains 20 pizzas and 10 compact discs. Prices Years Pizza CDs 2002 $10 $15 2003 $11 $15 2004 $12 $16 2005 $13 $15 From this table, we can calculate the inflation rate as: Years Cost of Basket CPI Inflation rate 2002 $350 100.0 n.a. 2003 370 105.7 5.7% 2004 400 114.3 8.1% 2005 410 117.1 2.5% GDP Deflator The GDP deflator, also called the implicit price deflator for GDP, measures the price of output relative to its price in the base year. It reflects what’s happening to the overall level of prices in the economy GDP Deflator = (Nominal GDP / Real GDP) ×100 Inflation rate = {(CPI current period – CPI preceding period) / CPI preceding period}*100 Years Nom. GDP Real GDP GDP Deflator Inflation Rate 2001 Rs46, 200 Rs46, 200 100.0 n.a. 2002 51,400 50,000 102.8 2.8% 2003 58,300 52,000 112.1 9.1% docsity.com © Copyright Virtual University of Pakistan 13 docsity.com