Miran Khan

Anjuman-I-Islam’s Allana Institute of Management Studies
Business Environment
Assignment: From syllabus explain any one topic (questions will be your Choice)
Name: KHAN MIRAN SAJID

Registration no. 2224019
Submitted to Dr. R. PADWAL
Batch: 2022-2024
MMS-1st Year
Semester – 2
Topic : Money and banking
Introduction
Banks are organized institutions that accept deposits from depositors and advance loans to
Borrowers. On the other hand, Money is the medium of exchange that allows the transfer of
Ownership of commodities from one person to the other.
What is money?
Money is an asset that can be used to make transactions. Or money is an asset that People
accept in exchange for goods and services and payments of debts.
Functions of money
Money serves several essential functions in an economy:
1.Medium of Exchange: Money facilitates transactions by acting as a commonly accepted
Medium that people can use to buy and sell goods and services.
2.Unit of Account: Money provides a standard measure of value that simplifies the process of
Comparing prices and determining the relative worth of different goods and services.
3.Store of Value: Money allows individuals to save their wealth over time. It retains its value
and Can be stored for future use without significant depreciation.
4.Standard of Deferred Payment: Money enables people to make agreements for future
Payments or debts, knowing that the value of money will likely remain stable.
5.Liquidity: Money is highly liquid, meaning it can be easily and quickly converted into goods,
Services, or other assets.
6.Measure of Value: Money serves as a common benchmark for assessing the value of goods,
Services, and assets in an economy.
These functions collectively contribute to the efficient functioning of an economy by facilitating
Trade, promoting price stability, and enabling individuals to manage their finances effectively.
How the quantity of money is controlled?

Control of the quantity of money in an economy is primarily the responsibility of a country’s
Central bank. Central banks use various tools and strategies to influence and control the money
Supply in order to achieve their goals of price stability, full employment, and overall economic
Growth. The process of controlling the quantity of money is known as “monetary policy.” Here’s
How it generally works:
1.Interest Rates: One of the most common tools central banks use to control the money supply
Is adjusting interest rates. By changing the benchmark interest rate (such as the federal funds
Rate in the United States), central banks can influence borrowing and lending behavior in the
Economy. When central banks raise interest rates, borrowing becomes more expensive, leading
To reduced borrowing and spending by businesses and consumers. This can slow down
Economic activity and decrease the money supply. Conversely, when central banks lower
interest Rates, borrowing becomes cheaper, encouraging more borrowing and spending, thus
increasing The money supply.
2.Open Market Operations: Central banks can also engage in open market operations. This
Involves buying or selling government securities (like bonds) in the open market. When the
Central bank buys government securities, it injects money into the economy, increasing the
Money supply. Conversely, when it sells government securities, it absorbs money from the
Economy, reducing the money supply.
3.Reserve Requirements: Central banks can set reserve requirements for commercial banks.
Banks are required to hold a certain percentage of their deposits as reserves. By increasing
Reserve requirements, central banks can reduce the amount of money that banks can lend out,
Thereby decreasing the money supply. Conversely, reducing reserve requirements allows banks
To lend more, increasing the money supply.
4.Quantitative Easing: In times of economic crisis or when interest rates are already near zero,
Central banks may resort to quantitative easing (QE). This involves the central bank
purchasingFinancial assets, such as government bonds and even private-sector assets, from
banks and Other financial institutions. The goal is to inject money directly into the financial
system to Encourage lending and stimulate economic activity.
5.Forward Guidance: Central banks also communicate their future policy intentions to influence
Expectations and behavior. If a central bank indicates that it plans to keep interest rates low for
An extended period, it can influence borrowing and spending decisions by businesses and
Consumers.
6.Exchange Rates: In countries with flexible exchange rates, the exchange rate can indirectly
Influence the money supply. Central banks can intervene in the foreign exchange market to buy
Or sell their own currency, affecting the exchange rate. A weaker currency can boost exports
and Stimulate economic activity, potentially increasing the money supply.
7.Macroprudential Policies: In addition to monetary policy, central banks may also use
Macroprudential policies to regulate the financial system and prevent excessive risk-taking.
These policies can indirectly impact the money supply by influencing lending practices and
Overall financial stability.It’s important to note that the effectiveness of these tools can vary
depending on the economic Conditions, the goals of the central bank, and the broader global
economic environment. Central Banks constantly monitor economic indicators and adjust their
monetary policy tools Accordingly to achieve their desired outcomes.
How the quantity of money is measured?

The quantity of money in an economy is typically measured using a classification known as the
“money supply,” which encompasses various forms of money and financial assets that are
widely Accepted for transactions and as a store of value. There are several different measures
of the Money supply, often categorized into different “monetary aggregates” based on their
liquidity And broader economic implications. The most common measures include:
M1: This is the most liquid measure of the money supply and includes currency in circulation
(physical coins and paper money) and demand deposits (checking accounts). These are funds
That can be readily used for transactions.
M2: M2 includes all of M1, plus savings accounts, time deposits (certificates of deposit or CDs),
And money market funds. These are slightly less liquid assets compared to M1 but are still
Considered part of the money supply because they can be quickly converted into spendable
Currency.
M3: In some economies, M3 is used as a broader measure of the money supply, encompassing
M2 along with larger time deposits, larger liquid assets, and institutional money market funds.
However, M3 is not always tracked by central banks or governments and is considered less
Commonly used.The measurement of the money supply is crucial for central banks,
policymakers, and Economists to understand the state of the economy, assess inflationary
pressures, and formulate Monetary policies. Central banks often adjust their monetary policy
tools (such as interest rates And open market operations) based on their assessment of the
money supply and its impact on Economic activity.It’s worth noting that the definitions and
components of the money supply can vary from Country to country and over time, depending
on the financial system’s structure and the specific Needs of each economy.
Advantages and disadvantages of money

1.Medium of Exchange: Money simplifies the process of trade by providing a universally
Accepted medium of exchange. Individuals can exchange goods and services without the need
or barter, which can be cumbersome and inefficient.
2.Unit of Account: Money serves as a common measure of value, making it easier to compare
The worth of different goods and services. This enables efficient pricing, budgeting, and
financial Planning.
3.Store of Value: Money retains its value over time, allowing people to save their wealth for
Future use. Unlike perishable or rapidly depreciating goods, money can be stored without
Significant loss of value.
4.Liquidity: Money is highly liquid, meaning it can be quickly converted into goods, services, or
Other assets. This liquidity ensures that transactions can take place efficiently and without
delay.
5.Standard of Deferred Payment: Money allows for future transactions to be easily planned And
executed. Contracts, loans, and debts can be structured in terms of a stable and widely
Accepted currency.
6.Portability and Divisibility: Money is portable, allowing individuals to carry and transfer
Significant value easily. It is also divisible into smaller units, enabling transactions of varying
Sizes.
Disadvantages of Money:
1.Inflation and Deflation: While money’s stability is an advantage, it can also be a Disadvantage
if the currency experiences significant inflation or deflation. Rapid inflation erodes Purchasing
power, while deflation can discourage spending and investment.
2.Subject to Manipulation: Governments and central banks can influence the money supply And
value through policies such as printing more money or adjusting interest rates. This
Manipulation can lead to economic instability or loss of confidence in the currency.
3.Requires Trust: The value of money is based on the trust of individuals and institutions that it
Will retain its value over time. If this trust is compromised, due to factors like hyperinflation or
Economic instability, the value of money can plummet.
4.Not Universally Accepted: While most modern economies use a national currency, money
May not be universally accepted in all situations or locations. International trade and currency
Exchange can be complicated and subject to exchange rate fluctuations.
5.Unequal Distribution: Money can exacerbate income inequality and wealth disparity. Those
Who have access to more money have greater purchasing power and opportunities for
Investment, potentially leaving others at a disadvantage.
6.Environmental Impact: The production of physical currency involves the use of resources,
Energy, and chemicals. Additionally, digital financial systems require significant energy for
Processing transactions and maintaining data centers.In conclusion, while money offers
numerous benefits for facilitating economic activities, it also Comes with its share of challenges
and potential negative consequences. The management of Money supply, stability of value, and
equitable distribution are ongoing concerns for economies Worldwide.

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Anjuman-I-Islam’s Allana Institute of Management Studies

Name: KHAN MIRAN SAJID

Topic : Money and banking

How the quantity of money is controlled?

How the quantity of money is measured?

Advantages and disadvantages of money

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