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CHAPTER 18

Understanding Money and Banking

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Chapter Outline

What Is Money? The Financial System The Reserve System The Changing Money and Banking

System International Banking and Finance

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What is Money?

Any object that is portable, divisible, durable and stable and that serves as a medium of exchange, a store of value and a unit of account

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What is Money?

Characteristics of Money Portability Divisibility Durability Stability

Functions of Money Medium of

Exchange Store of Value Unit of Account

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The Spendable Money Supply: M-1

M-1 counts only the most liquid, or spendable, forms of money. It includes: Currency Checks Demand Deposits

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M-1 Plus the Convertible Money Supply: M-2

M-2 includes everything in M-1 plus items that cannot be spent directly but are easily converted to spendable forms. Major components of M-2: M-1 Time Deposits Money Market Mutual Funds Savings Deposits

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Financial Institutions Commercial banks are

companies that accept deposits that they use to make loans and earn profits Diversification and

Mergers Commercial Interest

Rates Prime Rate

Savings and loan associations (S&Ls) accept deposits and make loans

Mutual Savings Banks and Credit Unions

Nondeposit Institutions Pension Funds Insurance Companies Finance Companies Securities Dealers

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Financial System of PakistanFinancial System of Pakistan

45 Commercial banks45 Commercial banks 16 Investment Banks16 Investment Banks

04 Housing Finance Companies04 Housing Finance Companies

04 Discount Houses04 Discount Houses

02 Venture Capital Companies02 Venture Capital Companies

32 Leasing Companies32 Leasing Companies

46 Modarbas46 Modarbas

39 Mutual Funds39 Mutual Funds

07 Listed Brokerage Houses07 Listed Brokerage Houses

37 Insurance Companies37 Insurance Companies

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Functions of Commercial Banks

Accepting of Deposits Making Loans and Advances Agency services to customers

Collection of cheques

Purchase or sale of securities Foreign exchange business

Export promotion cell

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STATE BANK OF PAKISTAN

“The State Bank” is the Central bank of Pakistan, which acts as the government’s bank, serves member commercial banks, and controls the nation’s money supply.

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The Structure of the State Bank

The Board of Governors The bank’s board of governors consists of

seven members appointed by the president.

Member Banks All chartered commercial banks are members of

the state bank of Pakistan.

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The Functions of the SBP

The Government’s Bank The state bank produces the nation’s paper

currency and lends money to the government. The Bankers’ Bank

The state bank makes loans to individual banks. The state bank provides storage for commercial

banks. The state bank clears checks.

Controlling the Money Supply The state bank is responsible for the conduct of

monetary policy.

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The Functions of the SBP

Overseeing the Banking Community Controlling the Money Supply

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The Tools of the SBP

Reserve requirement is the percentage of its deposits that a bank must hold in cash or on deposit with State bank.

Discount rate is the interest rate at which member banks can borrow money from the State Bank Reserve.

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The Tools of the SBP

Open-market operations refer to the state bank’s sale and purchase of securities in the open market

Selective credit controls is the state bank’s Reserve authority to set both margin requirements for consumer stock purchases and credit rules for other consumer purchases

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What is the World Bank?

U. N. agency that provides a limited scope of financial services

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What is the International Monetary Fund (IMF)?

U.N. agency consisting of about 150 nations that have combined resources to promote stable exchange rates, provide temporary short-term loans and serve other purposes