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Element of correction Resit session bachelor degree Banking and Finance

1) Discuss the contigent function of money

Also called the incidental functions. The contingent functions are based on traditional functions
(primary & secondary), made possible by Prof David Kinsley. He outlined the functions as;

1. Money as the most liquid of all assets. Wealth can be in the form of bonds, debentures, etc. There
is an opposite direction- meaning that money can be turned into the other forms of wealth and the
other forms of wealth can also be turned into money. Savings can be kept in securities. Money aids
the functions of liquidity.

2. Money is the basis of the credit system. Behind or underneath every credit is money. Credit
creation can expand money supply through money multiplier. Whatever credit one receives, one
pays/receives it back in money (Cash). Money has helped in the formation of capital or money
market. These are based on the fact that money performs the function of unit of account.

3. It brings about the equalization of marginal utility and productivity. Within the indifference curve
analysis, where MUx = λPx, given the Px and λ marginal utility of good x (MUx) can be estimated. It
also helps in estimating the productivity of a firm and how much to pay for wages, W of labour based
on marginal productivity of labour (MPL). i.e. W = MPL. But MPL determines the productivity of a
labour. Therefore, given wages of the individual, the MPL can be measured in the perfect market.

4. Measurement of National Income The National income (Y) couldn’t have been possible to be
calculated in the barter system. But with the use of money, it is easy to estimate the total income, Y
of a country to determine the country’s welfare. It also helps in calculating the GDP.

5. In the distribution of National Income Rewards to the factors of production in the form of wages,
rent, interest and profit are all determined and paid with money.

2) Discuss on the evolution of the payment system

1. Barter: Evidence of the existence of a barter system goes back to the Neolithic, starting with the
emergence of the agricultural/livestock society (probably before 7000 BC). Barter is exchange of
material goods or services for other goods or services.
2. Coins: Their first appearance dates from approximately 680 to 560 BC, in what it is now Turkey.
The use of coinsescalated because barter sometimes posed difficulties for transactions, and certain
forms of payment were perishable, so they could not be accumulated. The result was the emergence of
coins made of precious metals. A circular shape was adopted as being the most practical.
3. Paper money and banknotes: Their function was to replace coins, because it was uncomfortable to
carry coins in large quantities. Banknotes were first used in China in the 7th century, but it was not
until 812 that their use became official. It is important to remember that until the 1970s, each issue of
banknotes by a country’s authorities had to be backed by a certain amount of gold.
4. Bills of exchange and checks: Bills of exchange date back to 12th-century Italy. This document
guaranteed that the debtor would pay the creditor or another person authorised to receive the money
in the commercial document. The origin of cheques, on the other hand, dates back to around the 18th
century, and is linked to the English Crown.
5. Cards: The first credit cards arrived in 1914, when the Western Union company created a loyalty
card for its most exclusive customers, giving them access to a line of credit without surcharges.
However, only from 1958 that banks started to offer cards as a payment solution. The first card
later came to be known as Visa.
6. Digital payments: With the arrival of the Internet and the World Wide Web system in 1990, goods
and services began to be sold through this new communication channel. One of the pioneers was the
company Peapod, which offered the possibility of buying groceries from home via a computer.
After the disrupted digital revolution of recent years, and with the introduction of new
technologies, it is now possible to pay by mobile phone or digital watch.
7. Cryptocurrencies: in 1998, Wei Dai proposed the idea of creating a decentralised type of
currency, which would be based on cryptography as a means of control. This gave rise to the
concept of cryptocurrency. The first attempts to create a currency were made by David Chaum, using
DigiCash and eCash. However, it was not until 2009 when, Satoshi Nakamoto (pseudonym), created
the first cryptocurrency, called bitcoin.

3) The role of money in the macroeconomy

Fundamentally, there are 2 main forms in which the role of money can be classified- Static role and
Dynamic role.
Static role: This role emerges from the traditional functions of money, which we have discussed
previously.
Dynamic role: In its dynamic role, Money plays an important part in the lives of people and in the
economic system as a whole.
a) Role of money to the consumer. It makes the consumer sovereign because the consumer has the
power to choose. It also ensures effective demand. It brings about postponement of consumption. The
consumer’s income is in the form of money.
b) To the producer. It helps in calculating revenue, cost, and profit. It also aids in planning,
forecasting and budgeting. It brought about specialization and division of labour and how much to pay
each skills according to the marginal product (MP).
c) It brought about capital formation by transferring saving into investment. Money has made it
possible for people to save usually for a long time and earn interest on their savings. Investment is also
linked closely with the growth of the economy. Increasing investment increases the income base of the
economy just because money goes around in the economy.
d) As an index of economic growth, National income, income per capita and GDP are all
measured in terms of money. When the value of money falls, prices increase and this may arise from
too much money in the economy. Money is the index of an economy. If the value of money increases,
it means the economy is getting well the general price levels.

4) Explain the credit creation of central banks

Before we begin the money supply or credit creation process, let me take a moment to walk you
through the fundamentals of the central bank balance sheet and the key players involved in the money
supply process. The money supply is determined by the interaction of four groups: commercial banks
and other depositories, depositors, borrowers, and the central bank. Like any bank, the central bank’s
balance sheet is composed of assets and liabilities. Its assets are similar to those of common banks and
include government securities.
The central bank’s liabilities, however, differ fundamentally from those of common banks. Its most
important liabilities are currency in circulation and reserves. It may seem strange to see currency and
reserves listed as liabilities of the central bank because those things are the assets of commercial
banks. In fact, for everyone but the central bank, the central bank’s notes are assets or things owned.
But for the central bank, its notes are things owed (liabilities). Every financial asset is somebody else’s
liability, of course. A promissory note (IOU) that you signed would be your liability, but it would be
an asset for the note’s holder or owner. Similarly, a bank deposit is a liability for the bank but an asset
for the depositor. In like fashion, commercial banks own their deposits in the central bank (CB)
(reserves), so they count them as assets.
The CB owes that money to commercial banks, so it must count them as liabilities. The same goes for
banknotes: the public owns them, but the CB, as their issuer, owes them. (Don’t be confused by the
fact that what the CB owes to holders is nothing more than the right to use the notes to pay sums the
holders owe to the government for taxes and the like.) Currency in circulation (C) and reserves (R)
compose the monetary base (MB, aka high-powered money), the most basic building blocks of the
money supply. Basically, MB = C + R, an equation you’ll want to internalize.