Money and Banking

Name: Amna Hafeez
Roll no: 20
Subject: Money and Banking
Semester: 4
BBA hons.
Topic:
• Types of money
• Function of money
• Segment, function and instrument of capital market
• Trade cycle and its phases
TYPES OF MONEY
Following are the types of money
Commodity money:
Commodity money can be thought of as earliest form of money. In
ancient times money was in the form of different goods that were
used by people in everyday life. Example: tools, equipment,
swords, knifes. The supply of these commodities were usually
governed by scarcity and cost of production. However, the problem
was that different societies were using different goods as money
Metallic money:
This comes next to commodity money. It consists of different metal
such as gold, silver etc. people started using of these money
because of their scarcity
Advantages:
1. They can be conveniently kept.
2. They can be converted into other currency
3. There is no chance of hoarding or melting as intrinsic value of
metal is less than the face value
Paper money:
Paper money means the money issued by the central bank of
Pakistan. This form of money is most widely used in all part of the
world. With the advent of printing press and paper making industry
paper currency became the most economical and famous form of
money
Three forms of paper money are:
1. Representative paper money: this is fully backed up by gold or
metallic reserves. This means the govt. can convert the money
into gold if they are presented for conversion
2. Convertible paper money: it is a form of money which can be
converted into gold and metallic reserves but not all the notes
issued by the govt. are fully backed by the gold
3. Fiat paper money. It is the money we kept in our pockets.
Neither it is convertible nor it is backed up by metallic reserves
or gold. It has been declared as legal tender by government
and is generally accepted as medium of exchange
Bank money
Bank money means near money as is also used as medium of
exchange. It is the important type of money in modern
economy. It consists following:
a) Cheque: a cheque is a written instruction on a specified
paper form client to his bank, instructing the later to pay a
certain sum of money
b) Bill of exchange: it is a convenient way to pay for
commercial transaction in credit. The seller instead of
taking cash from the buyer draws a bill on him which a
buyer accepts by signing it.
c) Drafts: it is drawn by bank on its own branch or any
other’s bank branch. Drafts are the cheque used by the
bank
Plastic money:
It means the credit cards and plastic cards which have silicon chips
and a specifically printed set of characters. These cards are used
for making payments
Functions of money
Following are the functions of money:
Primary function:
These functions are those which are performed by money on
account of its major characteristics:
a) Medium of exchange: money serves as medium of
exchange. It is used to make payment for goods and services.
It is a medium that helps buyer to complete transaction
b) Standard of value: money served as a standard of value.
The goods and services of modern world are price in term of
money. Money measures the value of everything in the same
way as kg is used to measure weight.
c) Store of value: money is also the store of value. It can be
saved for use in future. In the form of money, the purchasing
power can be stored to buy goods in future
Secondary functions:
a) Market mechanism: money is at the base of market
mechanism. In other words, the market mechanism and the
demand and supply work only because of money
b) Income and consumption: all economic variables including
Income and consumption are determined in terms of money.
c) Instrument of modern economy: money is the basic and
most important Instrument of modern economy. All the
economic policies are applicable only because of the fact that
it is possible to state the price of everything in money.
d) Monetary and fiscal instrument: money is important
element of Monetary and fiscal policies of government.it
plays its role in all type of economic action taken by
government
e) Aids to economic activities: all types of economic activities
are happened in terms of money. It has facilitated the process
of expansion of trade and commerce
f) Specialization and trade: money has made specialization
possible. In today’s world, nation tends to specialize in the
production of things they have comparative advantage and
then they trade what they have produced for what they need
Contingency factor:
a) Basis for economic theories: money is the basis for all
economic theories. The consumption theory, production
theory is all applicable because of the function of money. They
are based on the assumptions that resources are priced in
monetary terms.
b) Basis of credit: money lies in the root of banking credit
system. It is the money that banks loan are expressed and
advanced
c) Efficiency and optimum allocation: due to money it’s
possible to evaluate different efficiency level. The cost of
resources stated in money term is equated with the price of
the product to determine allocative and productive efficiency
Conclusion: there are variety of function which money

performed for us in the modern world
Segment, function and instrument of
capital market
Capital market:
A capital market is one in which individuals and institutions trade
financial securities. The most common capital markets are the
stock market and the bond market. Organizations and institutions in
the public and private sectors also often sell securities on the capital
markets in order to raise funds.
Segments of capital market:
Following are the types of segment in capital market
• Primary market
• Secondary market
Primary market:
These are those where new equity stock and bond issues are sold
to investors
When a company publicly sells new stocks or bonds for the first
time, it does so in the primary capital market. This market is
sometimes called the new issues market.
Secondary market:
Secondary markets are those which trade existing securities.
where these previously issued securities are traded between
investors. Issuing companies do not have a part in the secondary
market.
Capital market instruments:
Capital market instruments are debt and equity instruments with
maturities of greater than one year. They have far wider price
fluctuations than money market instruments and are considered to
be fairly risky investments.
Following are the capital market instruments
Stocks: Stock are equity claims on the net income and assets of a
corporation. the amount of new stock issues in any given year is
typically quite small, less than 1% of the total value of shares
outstanding. Individuals hold around half of the value of stocks; the
rest are held by pension funds, mutual funds, and insurance
companies
Mortgages and Mortgage-Backed Securities Mortgages
are loans to households or firms to purchase land, housing, or other
real structures, in which the structure or land itself serves as
collateral for the loans. In the mortgage market amount of
residential mortgages (used to purchase residential housing)
outstanding more than quadruple the amount of commercial and
farm mortgages. Mortgages are provided by financial institutions
such as savings and loan associations
Corporate Bonds These long-term bonds are issued by
corporations with very strong credit ratings. The typical corporate
bond sends the holder an interest payment twice a year and pays
off the face value when the bond matures. Some corporate bonds,
called convertible bonds, have the additional feature of allowing the
holder to convert them into a specified number of shares of stock
at any time up to the maturity date.
State and Local Government Bonds: State and local bonds,
also called municipal bonds, are long-term debt instruments issued
by state and local governments to finance expenditures on schools,
roads, and other large programs. An important feature of these
bonds is that their interest payments are exempt from federal
income tax and generally from state taxes in the issuing state
Consumer and Bank Commercial Loans These loans to
consumers and businesses are made principally by banks but, in
the case of consumer loans, also by finance companies.
Functions of capital market:
The important functions and significance of the markets have been
discussed below:
Economic Growth: Capital Markets help to accelerate the
process of economic growth. It reflects the general condition of the
economy. The capital Market helps in the proper allocation of
resources from the people who have surplus capital to the people
who are in need of capital. So, we can say that it helps in the
expansion of industry and trade of both public and private sectors
leading to balanced economic growth in the country.
2. Promotes Saving Habits: After the development of Capital
Markets, the taxation system, and the banking institutions provide
facilities and provisions to the investors to save more. In the
absence of Capital Markets, they might have invested in
unproductive assets like land or gold or might have indulged in
unnecessary spending.
3. Stable and Systematic Security prices: Apart from the
mobilization of funds, Capital Markets help to stabilize the prices of
stocks. Reduction in speculative activities and providing capital to
borrowers at a lower interest rate help in the stabilization of the
security prices.
4. Availability of Funds: Investments are made in Capital Markets
on a continuous basis. Both the buyers and sellers interact and
trade their capital and assets through an online platform.
Trade cycle and its phases

Trade cycles refer to regular fluctuations in the level of national
income. It is a well-observed economic phenomenon, though it
often occurs on a generally upward growth path and has a variable
time span, typically of three years.
In trade cycles, there are upward swings and then downward

swings in business. Every boom is followed by a slump, and vice
versa. Thus, the trade cycle simply means the whole course of
trade or business activity which passes through all phases of
prosperity and adversity. A full trade cycle has got four phases:
(i) Recovery,
(ii) Boom
(iii) Recession
(iv) depression.
Depression: In this phase, the whole economy is in depression and

the business is at the lowest ebb. The general purchasing power
of the community is very low. The productive activity, both in the
production of consumer goods and the production of capital goods,
is at a very low level. Business settles down at a new equilibrium
point with a low level of prices, costs and profits. It may last for a
number of years. Following are the characteristics of depression:
(i) The volume of production and trade shrinks,
(ii) Unemployment increases,
(iii) Overall prices fall,
(iv) Profits and wages fall, thus, the income of the

community falls to a very low level,
(v) Aggregate expenditure and the effective demand

come down,
(vi) There is a general contraction of credit and little

opportunity to invest,
(vii) Stock markets show that prices of all shares and

securities have fallen to a very low level,
(viii) Interest rates decline all round,
(ix) Practically, all construction activity – whether in

buildings or machinery, comes to an end.
(b) Recovery: This phase is also known as ‘expansion’. The

depression period of trade cycle ends in the recovery period. The
economic situation has now become favourable. Money is cheap
and so are the other materials and the factors of
production. Productive activity has been increased. The
entrepreneurs have now sufficient financial
backing. Constructional and allied industries are receiving orders
and employing more workers, thus creating more income and
employment. This stimulates further investment and
production. The whole economy is moving faster towards the
boom.
(c) Boom: Boom or peak is the turning point of the trade cycle. It
is the highest point of economic recovery. The typical features of
boom are as follows:
(i) A large number of production and trade,
(ii) A high level of employment and job opportunities

in sufficient amount to permit a good deal of labour
mobility,
(iii) Overall rising prices, A rising structure of interest

rates, so that a bullish tendency rules stock
exchanges,
(iv) A large expansion of credit and borrowing, High

level of investment, i.e., manufacturing or machinery
(v) A rise in wages and profits so that the community’s

income rises, and
(vii) Operation of the economy at optimum capacity.
(d) Recession: It is a sharp slow down in economic activity, but it

is different from depression or slump which is more severe and
prolonged downturn.
The trade cycle is depicted in the following diagram:

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Name: Amna Hafeez

Conclusion: there are variety of function which money

Trade cycle and its phases

In trade cycles, there are upward swings and then downward

Depression: In this phase, the whole economy is in depression and

(ii) Unemployment increases,

(iii) Overall prices fall,

(iv) Profits and wages fall, thus, the income of the

(v) Aggregate expenditure and the effective demand

(vi) There is a general contraction of credit and little

(vii) Stock markets show that prices of all shares and

(viii) Interest rates decline all round,

(ix) Practically, all construction activity – whether in

(b) Recovery: This phase is also known as ‘expansion’. The

(i) A large number of production and trade,

(ii) A high level of employment and job opportunities

(iii) Overall rising prices, A rising structure of interest

(iv) A large expansion of credit and borrowing, High

(v) A rise in wages and profits so that the community’s

(vii) Operation of the economy at optimum capacity.

(d) Recession: It is a sharp slow down in economic activity, but it

The trade cycle is depicted in the following diagram:

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