LECTURE 02 IBFT 05204.pdf

MONEY AND INFLATION
IBFT 05204
PRESENTED BY
MR.THABITI MOHAMEDI ALLY
FACULTY OF BUSINESS ADMINISTRATION
MUSLIM UNIVERSITY OF MOROGORO

Module’s Outline
▪ Up to the end of this lecture a student should be
able to explain the following:
✓The definition of money
✓Definition of inflation
✓Common effects of inflation
✓Types of money
✓Types of inflation
✓Historical examples of inflation
2/26/2023 MR. THABITI
2

Concept of
Money
❖Although we typically think of “money” as
coins and paper currency or funds in checking
accounts. In fact, economists have a very
general definition of money:
➢Money is anything that people are willing to
accept in payment for goods and services or to
pay off debts.
➢money supply is the total quantity of money in
the economy.
3

What Is Money
?
▪ Money; refers to the any thing that is generally
accepted as payment for goods and services or
in the settlement of debts
▪ Using money allows buyers and sellers to pay
less in transaction costs compared to barter
trading .
4

Features Of
Money
i. Acceptable: This means that every one must be able to
accept the money for transactions without any
hesitations
ii. Durable: money should be durable enough to retain its
usefulness for many, future exchanges .
iii. Divisible: This means that money can be divided into
small units that can be used for exchange for goods and
services
5

Features Of
Money
iv. Uniformity: This means that all types of the same
denomination must have the same purchasing power
v. Portable: This means that money should be easy to be
carried from one place to another place for transaction
vi. Limited supply: For the money to retain its worth
there must be a limited supply .The more the money in
circulation the less it is valued.
6

Key Functions
Of Money
❑ Money serves four key functions in the
economy which are as follows;
I. It acts as medium of exchange
II. It is a unit of account
III. It acts as a store of value
IV. It offers a standard of differed payment
7

Types Of
Money
1) Commodity money
2) Metallic money
3) Paper money
4) Credit money
5) Plastic money
6) Electronic money
8

Commodity
money
➢Was the first type of money which was used
during the earliest period of human civilization
➢any commodity that was generally demanded
and accepted was chosen and used as money
9

Metallic money
➢ Is the form of money in form of metals like
gold ,silver and copper which were used in
early period of human civilization.
10

Paper money
It was found inconvenient as well as dangerous
to carry gold and silver coins from place to
place. so the invention of paper money marked
a very important stage in the development of
money.
➢Is a country’s official paper currency that is
circulated for transactions involved in acquiring
goods and services.
11

Credit money
▪ Is the form of money is the monetary value
created as the result of some future obligations
or claim.
▪ Credit money emerges from the extension of
credit or issuance of debt.
▪ The cheque (credit money or bank money) its
self is not money but it performs the same
functions as money.
12

Legal tender
money
➢This is the form of money which accepted only
within a country to facilitate day to day
transactions and not outside the country except
when exchanged new legal tender.
13

Plastic money
➢Is the money inform of credit cards (visa cards,
Mastercard) and debit cards .It aims on
reducing the needs for cash to make
transactions
➢Credit card is a small plastic card issued by a
bank or business owner allowing the holder to
purchase goods or services on credit.
14

Electronic
money
➢Electronic money (e-money) refers to the
money that is exists in banking computer
systems that may be used to facilitate electronic
transactions.
➢The value of electronic money maybe backed
by fiat currency and be exchanged into
physical, tangible form
➢Example of electronic money method is
PayPal.
15

NB.
❑Digital currency ,and crypto currency are other
modernized form of money used in transactions
especially via the internet
16

INFLATION
17

What Is
Inflation ?
18

Definition Of
Inflation
▪ Inflation rate is the percentage change in the
overall level of prices from one year to the next.
▪ Is the persistent increase in prices of
commodities and services and decline of
purchasing power of currencies .
▪ Is a rise in prices of goods and services due to
the decline of purchasing power of currencies
19

Deflation
▪ Is the contrast of inflation which means, the
decline of prices of goods and services relative
to the increase in purchasing power of
currencies
▪ Both inflation and deflation are expressed in
percentage.
20

How is inflation
?
“We used to go to the stores with money in our
pockets and come back with food in our baskets.
Now we go with money in baskets and return
with food in our pockets. Everything is scarce
except money”
21

Types Of
Inflation
▪ Inflation has been categorized into three
categories which are:
1) Low inflation
2) Galloping inflation
3) Hyper inflation
22

Low inflation
oIt can be defined as single-digit annual inflation
rate characterized by slow rise and predictable
prices.
23

Characteristics
of Low
Inflation
1) People trust money because it retains its
value from month to month and year to year.
2) willing to write long-term contracts in
money terms because they are confident that
the relative prices of goods they buy and sell
will not get too far out of line.
24

Galloping
Inflation
oThis is inflation rate in the double-digit or
triple-digit range of 20, 100, or 200 percent per
year .
oGalloping inflation is relatively common in
countries suffering from weak governments,
war, or revolution.
25

Characteristics
of Galloping
Inflation Rate
1) Most contracts get signed to a price of a
foreign currency like the dollar.
2) Money loses its value very quickly.
3) Financial markets wither away, as capital flees
abroad.
4) People hoard goods, buy houses, and never,
ever lend money at low nominal interest rates.
26

Hyperinflation
oA third and deadly kind of inflation in which
prices are rising a million or even a trillion
percent per year.
▪ The most documented case of hyperinflation
took place in the Weimar Republic of Germany
in the 1920s when the government decided to
print huge amount of currency to finance deficit
due to the low tax collection.
27

Features of
hyperinflation
1) The real money stock falls drastically.
2) Decreasing the real money demand.
3) Increasing the spend of money. People were
seen running from store to store, dumping
their money like hot potatoes before they get
burned by money’s loss of value.
4) Relative prices become highly unstable.
28

Causes Of
Inflation
❖An increase in the supply of money is the root
of inflation.
oA country’s money supply can be increased by
monetary authorities through:
i. Printing and giving away more money to
citizens.
ii. Legally devaluing the legal tender currency.
iii. Loaning new money into existence.
29

Causes Of
Inflation
oIn order to get deep understanding about the real
causative agents of inflation we must describe the
modern inflation theories which are:
a. Demand pull
b. Cost-push (stagflation)
c. Built-in
30

A: demand
pull effect
▪ Demand pull inflation occurs when an increase in the
supply of money and credit stimulates the overall
demand for goods and services to increase rapidly than
economy’s production capacity.
▪ When people have more money, spend more and
increases the demand under the constant supply
▪ The increase in demand leads the increase in prices and
hence inflation rises.
31

B: Cost Push
Effect
▪ Cost push inflation is a result of the increase in
prices of production inputs which leads higher
cost of finished products or services.
▪ In order to generate profit a producer charges
high price so as to compensate the cost of
production and hence inflation occurs.
32

C: Built-in
inflation
▪ This is the result of adaptive expectation or idea
that people expect current inflation rate to
continue in the future.
▪ As such, workers may demand more wages to
maintain their standard of living.
▪ Their increased wages results in a higher cost of
goods and services and induces each other.
33

PROS &
CONS OF
INFLATION
▪ Inflation can termed as good or bad depending
to the upon which side one takes and how
rapidly the change will take.
34

Pros Of
Inflation
i. It bring about higher price and profit to sellers
ii. It enhance speculation and higher return
iii. It boost economic activities due to high level
of spending
iv. It leads to higher resale value of assets
v. It encourage spending
35

Cons of
inflation
i. It leads to the higher and unaffordable prices
to some people
ii. It induce a tendence of uncertainty in the
economy
iii. It increases cost in economy for researching,
estimating and adjusting the economic
condition
36

Historical
Examples Of
Inflation
▪ The most famous example is hyperinflation that struck
the German Weimar republic in the early of 1920s.
▪ The nations that were the victorious in world war I
demanded reparations from Germany, which could not be
paid in German paper currency as this was of suspect
value due to government borrowing.
▪ German attempted to print paper notes, buy foreign
currency with them and use that to pay their debts.
37

Cont.…
▪ This policy led to the rapid devaluation of the
German mark.
▪ More and more money flooded the economy
and its value declined up to the point where
people would paper their walls .
▪ Similar situations occurred in Peru in 1990
and in Zimbabwe between 2007 and 2008.
38

The end
SEE YOU NEXT CLASS
INSHAALLAH
39

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