ORKID GROUP

MONEY
AND

BANKING

Here starts
the lesson!

Functions of money

Standard Medium of Measure of
of deferred exchange value/unit
of account
Store
of value

QUALITIES • Portability
OF MONEY • Stability
• Relative scarcity
• Durability

• Acceptability

• Divisibility



Demand
and Supply
of Money



❑ MONEY DEMAND (Md)

– Negatively related to interest rate
– Positively related to income.

❑ MONEY SUPPLY (MS)

– Fixed by central bank
– Not affected by interest rate



PROCESS OF CREDIT IMPORTANT FORMULA
CREATION (cont.)
1. Cash Ratio = Cash
reserve/Initial deposit
X 100

2. Money Multiplier =
1/Cash ratio

3. Total Money Supply =
1/Cash ratio X Initial
deposit

4. Total Reserves = 1/Cash
ratio X Initial reserve

5. Total Credit Creation =
1/Cash ratio x Initial
loan

PROCESS OF CREDIT CREATION (cont.)

LIMITATION TO CREDIT CREATION

❖ A change in cash ratio/legal reserve requirement
❖ Clearing house – slows down the process
❖ Availability of collateral security – mortgages,

land titles
❖ Bank Negara Malaysia’s monetary control will

affect amount of loans

UNEMPLOYEMENT
AND INFLATION

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the lesson!

Business Cycle Definition

Business cycle
refers to wave-like
fluctuations in
aggregate economic
activities
particularly in
national income,
employment and
output.

Phases of
Business Cycle

Peak or Boom 1 2 Recession

● The period where the economy is at ● The period where real GDP declines.

full employment. ● Output decreases and unemployment

● Maximum output and lowest rate increases.

unemployment rate ● A deep and long recession is known as

Trough 3 depression.

The period where the output is Recovery
minimum and unemployment
rate is maximum. 4 The period where the output

level increases and
unemployment rate declines



UNEMPLOYMENT 2. UNEMPLOYMENT

DEFINITIONS : Defined as labour force
participants being available
1. LABOUR FORCE
and willing to work but
Defined as people from the unable to find jobs.
total population above the
16 years of age, not in any
institutions and who are

either employed or
unemployed but actively

seeking for jobs.

UNEMPLOYMENT 4. A DISCOURAGED
WORKER
3. UNEMPLOYMENT RATE
An individual who wants to
The percentage of the work but has been
labour force that is
unsuccessful for a long
unemployed and actively period in finding a job and
seeking jobs.
has given up seeking jobs.

UNEMPLOYMENT 6. FULL EMPLOYMENT

5. UNDEREMPLOYMENT The situation in the
economy where all
An individual who works available resources are
part-time or who are in jobs employed to produce goods
below their capability, but
and services.
who are seeking full-time
employment

Types of Effects of
Unemployment Unemployment

− FRICTIONAL a) Effects on Individuals
UNEMPLOYMENT and Society

− CYCLICAL b) Effects on the Economy
UNEMPLOYMENT

− STRUCTURAL
UNEMPLOYMENT

− SEASONAL
UNEMPLOYMENT

Measures to Control Unemployment

1 23

Direct Control Measures Monetary Policy

− Providing training and − Open market operation Fiscal Policy
education
− Lowering reserve − Decrease in tax
− Job creation requirement − Increase in

− Development of new − Lowering discount rate government
land expenditure
− Lowering interest rate

INFLATION CALCULATION
INFLATION RATE = CPI 2007 – CPI 2006 X 100%
Definitions :
CPI 2006
● INFLATION

A continuous increase in the general price level of goods
and services in the economy.

● DEFLATION

A decrease in the general price level of goods and services
in the economy.

● STAGFLATION

The condition in an economy where it experiences high
unemployment and rapid inflation simultaneously.

● DISINFLATION

A reduction in the rate of inflation.

Causes of Inflation

● Demand-pull inflation ● Cost-push inflation

Distribution of 2. Losers
Income
− Fixed income group
1. Gainers − Holders of government

− Businessman bonds, fixed deposits
− Property owner − Creditors
− Shareholders
− Debtors

Measures to Control Inflation

DIRECT CONTROL MEASURES MONETARY POLICY
− Price control and rationing − Open market operation
− Compulsory savings − Raising reserve
− Anti-hoarding campaign
requirement
FISCAL POLICY − Raising discount rate
− Increase in tax − Raising interest rate
− Decrease in government

expenditure

INTERNATIONAL
TRADE

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the lesson!









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Assignment

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