FUNDAMENTALS OF MONEY AND
BANKING (1414)
Q.1. How many types of banks exist in
Pakistan? Give a very brief resume of each type
In Pakistan, there are primarily three types of banks?
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1. **Commercial Banks**: These are the most common banks in
Pakistan, providing a wide range of financial services to individuals,
businesses, and government entities. They accept deposits, offer loans, and
facilitate various financial transactions. Examples include Habib Bank Limited
(HBL), National Bank of Pakistan (NBP), and United Bank Limited (UBL).
2. **Islamic Banks**: These banks operate in accordance with
Islamic principles, adhering to Shariah law. They offer interest-free banking
products and services, relying on profit-sharing arrangements and Islamic
contracts like Mudarabah and Musharakah. Examples include Meezan Bank, Bank
Islami Pakistan, and Dubai Islamic Bank Pakistan Limited.
3. **Development Finance Institutions
(DFIs)**: DFIs focus on
providing long-term financing for development projects in key sectors such as
agriculture, industry, and infrastructure. They play a crucial role in
supporting economic growth and development initiatives. Examples include the
Pakistan Industrial Credit and Investment Corporation (PICIC) and the House
Building Finance Corporation (HBFC).
Each type of
bank serves specific purposes and caters to different segments of the
population, contributing to the overall financial ecosystem of Pakistan.
Q.2. Define devaluation and inflation.
What are main effects of inflation in Pakistan?
Sure, here are
the definitions and main effects of devaluation and inflation:
**Devaluation**: Devaluation refers to a deliberate
downward adjustment in the value of a country's currency relative to other
currencies, often done by a government or central bank. It is typically done to
address trade imbalances, boost exports, and stimulate economic growth. When a
currency is devalued, its exchange rate decreases, making exports cheaper for
foreign buyers and imports more expensive for domestic consumers.
**Inflation**: Inflation is the rate at which the
general level of prices for goods and services in an economy rises over a
period of time. It indicates a decrease in the purchasing power of a nation's
currency, meaning that each unit of currency buys fewer goods and services.
Inflation can be caused by various factors, including increased demand relative
to supply, expansionary monetary policies, rising production costs, and
external factors such as changes in exchange rates.
In Pakistan, the main effects of
inflation include:
1. **Decreased purchasing power**: Inflation erodes the value of money,
leading to a decline in the purchasing power of consumers' incomes. This can
reduce the standard of living for individuals and families, especially those on
fixed incomes or with limited access to resources.
2. **Reduced savings and investment**: High inflation rates can discourage
saving and investment as people seek to protect their wealth from losing value.
This can hinder capital formation and long-term economic growth.
3. **Income distribution effects**: Inflation can impact different segments
of the population differently. Those with fixed incomes, such as retirees or
low-wage workers, may struggle to keep up with rising prices, exacerbating
income inequality.
4. **Uncertainty and volatility**: Rapidly changing prices can create
uncertainty in the economy, affecting consumer and investor confidence.
Businesses may delay investment decisions, leading to slower economic activity
and job creation.
5. **Cost-push inflation**: In Pakistan, factors such as energy
prices, food prices, and global commodity prices can contribute to cost-push
inflation, where rising production costs are passed on to consumers in the form
of higher prices for goods and services.
Addressing
inflation requires a combination of monetary and fiscal policies aimed at
controlling the money supply, managing aggregate demand, and addressing
structural factors affecting prices in the economy.
Q.3. Define money and also explain the
Friedman’s Modern Quantity Theory of Money.
Certainly! Let's start with the
definition of money:
**Money**
refers to any generally accepted medium of exchange for goods and services and
serves as a measure of value and a store of wealth. It can take various forms,
including physical forms like coins and banknotes (known as currency) and
digital forms like bank deposits and electronic transfers. Money facilitates
transactions by eliminating the need for barter, where goods and services are
exchanged directly for other goods and services.
Now, let's delve into Milton Friedman's
Modern Quantity Theory of Money:
**Friedman's
Modern Quantity Theory of Money** is an updated version of the classical
Quantity Theory of Money, which was originally proposed by economists such as
Irving Fisher and Alfred Marshall. Friedman's version emphasizes the
relationship between the quantity of money in an economy and its effect on
prices, inflation, and economic activity.
The equation at the core of Friedman's
theory is the Quantity Equation, which states:
\[ M \times V =
P \times Y \]
Where:
- \( M \)
represents the quantity of money in circulation.
- \( V \)
represents the velocity of money, or the rate at which money is spent in the
economy.
- \( P \)
represents the price level of goods and services.
- \( Y \)
represents the real output or real GDP of the economy.
According to
Friedman's theory, changes in the quantity of money affect prices and economic
ctivity. However, unlike the classical Quantity Theory, which assumed a stable
velocity of money, Friedman introduced the concept of "velocity
variability." He argued that changes in the velocity of money can affect
the economy independently of changes in the money supply.
Key points of Friedman's theory include:
1. **Long-Run Neutrality of Money**: Friedman argued that in the long run,
changes in the quantity of money only affect nominal variables (such as prices
and nominal GDP) and have no real effect on the economy's productive capacity
or real output.
2. **Monetary Policy**: Friedman emphasized the importance of
stable and predictable monetary policy to maintain price stability and promote
long-term economic growth. He advocated for a rule-based approach to monetary
policy, such as targeting a constant growth rate of the money supply, to avoid
the negative effects of discretionary policy.
Overall,
Friedman's Modern Quantity Theory of Money has had a significant influence on
monetary economics and central banking practices, highlighting the importance
of understanding the relationship between money, prices, and economic activity.
Q.4. Discuss in brief the main
advantageous of a letter of credit to the:-
i. Commercial bank
ii. The importer
iii. The exporter
Certainly! Here are the main advantages
of a letter of credit (LC) for each party involved:
i. **Advantages for the Commercial
Bank**:
- **Risk Mitigation**:
A letter of credit reduces the risk for the commercial bank by providing
assurance of payment from the issuing bank upon presentation of compliant
documents.
- **Fee Income**:
Banks earn fees for issuing and confirming letters of credit, adding to their
revenue streams.
- **Enhanced Reputation**:
Providing LC services enhances the bank's reputation as a reliable financial
institution, attracting more clients and business opportunities.
- **Facilitates Trade**:
LCs facilitate international trade by providing a secure payment mechanism,
thus promoting the bank's role in global trade finance.
ii. **Advantages for the Importer**:
- **Risk Reduction**:
Importers benefit from reduced risk of non-delivery or non-compliance with
agreed-upon terms by ensuring that payment is made only when specified
conditions are met.
- **Credit Facility**:
Importers can negotiate favorable payment terms with suppliers since the letter
of credit serves as a credit facility, allowing them to defer payment until
goods are received and documents are presented.
- **Trade Financing**:
Importers can utilize the LC as a form of trade financing, enabling them to
conserve cash flow for other business expenses.
- **Confidence in Transactions**: Importers gain confidence in international transactions,
knowing that payment is guaranteed upon compliance with the terms of the LC.
iii. **Advantages for the Exporter**:
- **Payment Security**:
Exporters receive assurance of payment upon fulfilling the terms and conditions
specified in the LC, reducing the risk of non-payment.
- **Risk Mitigation**:
LCs mitigate risks associated with international trade, such as political
instability, currency fluctuations, and creditworthiness of foreign buyers.
- **Access to Financing**:
Exporters can use the LC as collateral to obtain financing from banks, improving
their liquidity and cash flow management.
- **Global Market Access**:
LCs enable exporters to enter new markets and engage with new buyers by
providing a secure payment mechanism that fosters trust and confidence.
Overall, a
letter of credit serves as a crucial tool in international trade, providing
benefits to all parties involved by mitigating risks, facilitating
transactions, and enhancing confidence in cross-border trade.
Q.5. What do you mean by the term
“System of Money” ? What are the essential
features that a monetary system should
have before it can be looked upon as
satisfactory?
The term
"System of Money" refers to the structure, rules, and institutions
governing the creation, circulation, and management of money within an economy.
It encompasses various components such as currency, banking systems, central
banking authorities, monetary policy frameworks, and financial regulations.
Essential features that a monetary
system should have before it can be considered satisfactory include:
1. **Stability**: A satisfactory monetary system should
provide stability in the value of money, avoiding excessive inflation or
deflation. Price stability ensures confidence in the currency and facilitates
economic planning and transactions.
2. **Liquidity**: The monetary system should ensure the
availability of an adequate supply of money to facilitate transactions in the
economy. This requires a balance between the money supply and the demand for
money to maintain liquidity without causing inflationary pressures.
3. **Trust and Confidence**: The monetary system should inspire
trust and confidence among economic agents, including consumers, businesses,
and investors. Confidence in the stability and integrity of the currency and
financial institutions is essential for the smooth functioning of the economy.
4. **Flexibility**: A satisfactory monetary system should
possess the flexibility to adapt to changing economic conditions and respond to
emerging challenges. This includes the ability to adjust monetary policy tools,
regulations, and frameworks as needed to promote economic stability and growth.
5. **Efficiency and Effectiveness**: The monetary system should be efficient
and effective in facilitating the allocation of resources, promoting economic
growth, and achieving policy objectives such as full employment and price
stability. This involves the efficient operation of financial markets, payment
systems, and monetary policy transmission mechanisms.
6. **Transparency and Accountability**: A satisfactory monetary system should
be transparent in its operations and decision-making processes, providing clear
communication of monetary policy objectives, actions, and outcomes. Central
banks and other monetary authorities should be accountable to the public and policymakers
for their actions and policies.
7. **International Compatibility**: In an increasingly interconnected
global economy, a satisfactory monetary system should be compatible with
international standards and practices to facilitate cross-border transactions,
trade, and capital flows. This includes adherence to international agreements,
coordination with other central banks, and cooperation in addressing global
economic challenges.
By possessing
these essential features, a monetary system can effectively fulfill its role in
supporting economic stability, growth, and prosperity within a country.
Dear Student,
Ye sample assignment h. Ye bilkul
copy paste h jo dusre student k pass b available h. Agr ap ne university
assignment send krni h to UNIQUE assignment
hasil krne k lye ham c contact kren:
0313-6483019
0334-6483019
0343-6244948
University c related har news c
update rehne k lye hamra channel subscribe kren:
JUST
5 BULLET POINTS WITHOUT ANY HEADINGS AND SUB BULLET POINTS