ECS 1601
Study Unit 2
Monetary sector
Money
- not a factor of production
- not income or wealth
o income = reward earned in the production
o wealth = assets that have been accumulated over time
Function of Money
Medium of exchange
Barter economy = economy that functions without money
requires double coincidence of wants
Forms of money
1. Anything that is generally accepted as payment for goods and services or that is accepted
to settle debt.
2. Unit of account
3. Store of value
a. money most liquid form
b. standard of deferred payment
Measure of money
M1 - Coins and notes (in circulation outside the monetary sector) as well as demand deposits
(including cheque and transmission deposits) of the domestic private sector with monetary
institutions.
M2 - Equal to M1 plus all other short term and medium term deposits of the domestic private
sector with monetary institutions.
M3 - Equal to M2 plus all long-term deposits of the domestic private sector with monetary
solutions.
Financial Intermediary
Acts as a link between surplus units in the economy and the deficit units.
- Amount of reserves will determine the size of the credit multiplier.
- Cash reserve requirements at any bank, held in a non-interest bearing account at SARB.
- Banks create demand deposits by granting credit to their clients in form of overdraft
facilities.
- Deposit cash into cheque account, no immediate change in the quantity of money.
- Greater monetary base, move opportunities for creating money.
- Government transactions exert influence on money supply.
- Transactions with foreign countries influences domestic money supply.
- Payments for import, negative effect on quantity of money.
- Country’s foreign resources increase, it’s money supply increase.
Study Unit 2
Monetary sector
Money
- not a factor of production
- not income or wealth
o income = reward earned in the production
o wealth = assets that have been accumulated over time
Function of Money
Medium of exchange
Barter economy = economy that functions without money
requires double coincidence of wants
Forms of money
1. Anything that is generally accepted as payment for goods and services or that is accepted
to settle debt.
2. Unit of account
3. Store of value
a. money most liquid form
b. standard of deferred payment
Measure of money
M1 - Coins and notes (in circulation outside the monetary sector) as well as demand deposits
(including cheque and transmission deposits) of the domestic private sector with monetary
institutions.
M2 - Equal to M1 plus all other short term and medium term deposits of the domestic private
sector with monetary institutions.
M3 - Equal to M2 plus all long-term deposits of the domestic private sector with monetary
solutions.
Financial Intermediary
Acts as a link between surplus units in the economy and the deficit units.
- Amount of reserves will determine the size of the credit multiplier.
- Cash reserve requirements at any bank, held in a non-interest bearing account at SARB.
- Banks create demand deposits by granting credit to their clients in form of overdraft
facilities.
- Deposit cash into cheque account, no immediate change in the quantity of money.
- Greater monetary base, move opportunities for creating money.
- Government transactions exert influence on money supply.
- Transactions with foreign countries influences domestic money supply.
- Payments for import, negative effect on quantity of money.
- Country’s foreign resources increase, it’s money supply increase.
