THE FINANCIAL SECTOR PART TWO

Remember to research the following terms for the upcoming zoom session this week.
1. Credit cards 8. money market accounts
2. Debit cards 9. Money Supply
3. Cheques 10. Supply of money in terms of M0,
4. Bill of Exchange M1, M2
5 E-commerce 11. traveller’s cheque
6. Demand for money 12. savings deposits
7. Chequing account

Today we will continue our lesson by looking at two concepts:

● demand for money
● money supply
Demand for money
Recall the concept of money, it is anything that is commonly accepted as an instrument or
medium of exchange. It is used to settle debts and pay for goods and services. So, what do
we mean by ‘demand for money’?
This is simply people’s (household and firms) desire to hold on to money so that it can easily
be exchanged for goods and services. Thus, we are saying if people hold on to money it
means there is a demand for it. The demand for the amount of money people wish to hold
is determined by three motives:
▪ Transactionary demand
▪ Precautionary demand
▪ Asset /Speculative demand

✔ Transactionary Demand : The stock of money people hold to pay everyday

predictable expenses;  this is related to income. In other words, the money we need
to purchase goods and services in day to day life.

✔ Precautionary demand : Holding money to meet unplanned/ unpredictable

expenditures and emergencies, in other words, the money we may need for
unexpected purchases or emergencies.

✔ Asset/Speculative demand:  The desire to have money for transactions other than 

those necessary for living. It is the stock of money, people hold, with zero risk, to
take advantage of expected future changes in the price of other financial assets (e.g.
bonds, stocks). In other words, people demand money as a way to hold wealth.
Money Supply
What Is the Money Supply?
Overview:
Economists tend to use the term “money” differently than most people. While people may
say a rich person “has a lot of money”, economists define money to mean only the most
liquid part of a person’s assets, i.e. that part that can most quickly and easily fund purchases
of goods and services.
Liquidity varies widely across assets from the most liquid asset (cash) to assets that are
illiquid because selling them involves all sorts of transaction costs (e.g. a house).
Economists’ definitions of money range from those including only the most liquid to others
including things that can be sold reasonably quickly and turned into cash.
Therefore, money supply is the total stock of money in the economy at any moment. This
supply of money is controlled by the Central Bank (in Jamaica, Bank of Jamaica (BOJ). The
supply of money comes in three terms M0, M1 (narrow money) and M2 (broad money).

M0: The monetary base, also known as M0 (“M zero”) is defined as the sum of currency
(notes and coins) in circulation and reserves held at the Central Bank.
M1-Narrow Money: These can be used directly to pay for goods and services. It includes
currency (notes and coins) in circulation, chequing deposits and travellers’ cheques.
M2- Broad money: Equals M1 plus other assets such as savings deposits and money market
accounts
The Financial Sector
In order to fully understand the financial sector, you needed to grasp the history of money
and the different concepts of money. Now let us look at the financial sector in more detail.
Recall: The financial sector is a section of the economy made up of firms and institutions
that provide financial services to individuals, the government, and firms. This sector is
comprised of banks, investment companies, insurance companies, development banks,
stock exchanges, credit unions etc.

▪ The financial sector is a complex mix or network of markets, households, businesses,

governments, laws, and institutions interacting with one another.

▪ There are businesses in this sector that act as links between spenders and savers, so
they are often termed ‘financial intermediaries’. These intermediaries conduct
monetary transactions and provide finance to individuals, firms, and the
government.

▪ The Central Bank is the apex of this sector followed by the other banks and non-bank
institutions (see diagram below). In the larger Caribbean islands, the financial sector
has grown extensively and is no longer dominated by commercial banks but by other
 institutions offering a wide array of services. The financial sector provides services
such as loans, savings and chequing accounts, money market accounts, stocks,
bonds, insurance etc. to households and firms.

Role/Functions of the Financial Sector

1. It attracts funds from businesses and households
Firms and individuals are encouraged to save their extra funds in the financial
institutions. It makes saving attractive by offering interest on the funds saved as well as,
keeping it secure since the financial institutions are monitored by the Central Bank and
regulated by the Financial Services Commission (FSC).
Jamaican depositors are also offered stability and protection by the Jamaica Depository
Insurance Corporation (JDIC). A strong financial sector gives people confidence and
assures safety for their deposits (funds).
2. Allows businesses and individuals to earn interest on their funds.
3. It provides the government with a source of funds for investment purposes.
4. It provides the private sector with a source of funds for investment purposes.
5. It provides households with a source of funds for investment purposes and spending.
6. It allows households and firms to the opportunity to be part owners of companies
7. It provides compensation when mishaps occur, thus reducing risk in the economy.

The informal sector :

This is the part of the economy engaged in the production of goods or services with the
primary objective of generating employment and incomes to the persons concerned but are
not under official control. The sectors are found in developing countries including Caribbean
economies.
 The Informal sector
(2002).mp4
Please watch the video or type in the link below on YouTube.
https://www.youtube.com/watch?v=9rOnDyhEyQI

Features of this sector may include:

▪ Production activities are not usually regulated by the government
▪ Production activities are not calculated in the national income statistics (money
value of all goods and services produced within a country within a given period,
usually a year).
▪ Size of the sector varies from 4-6% in high income countries to over 50% in low
income countries. Size increases during an economic downturn or recession.
▪ Workers in this sector might be considered unemployed based on official
statistics
▪ Income earners do not pay taxes
▪ Earners are not covered by minimum wage legislations and social security system
▪ It provides jobs and reduces unemployment, but the jobs offer low pay
▪ Fosters growth in entrepreneurial activities among lower income groups but
entrepreneurs do not abide by tax and labour laws.
▪ Provides informal sources of finance moneylenders, pawnbrokers, rotating
savings (partner/sou sou)

Questions for guided discussion.

1.Define the term ‘demand for money’ and outline the three motives behind the
‘demand for money’?
2. According to economists, discuss the term ‘liquidity’.
3. Explain the concept ‘money supply’ along with M0, M1 and M2. Who is in control of
the money supply in Jamaica.
4. Distinguish among the terms savings deposit, chequing deposits, money market
accounts. What is a travellers cheque
5a. Financial sector is classified as a ‘network of financial interaction’. Name five players
that are involved in this network.
5b. Give three examples of financial institutions in the financial sector.
6. Discuss two roles/functions of the financial sector giving an example for each.
7. Differentiate between the financial sector and the informal sector
8. Outline some characteristics of the informal sector.
For next lesson research the following institutions
Central Bank
Commercial Bank
Stock Exchange
Credit Union
Development Bank
Insurance Company
Mutual Fund
Building Society
Investment Trust Company

List of Sources
https://stats.oecd.org/glossary/detail.asp?ID=1350

https://www.karlwhelan.com/IMB/part5.pdf

https://www.edb.gov.hk/attachment/tc/curriculum-development/kla/pshe/references-and-
resources/economics/Money%20Supply%20and%20Money%20Demand(File%204).pdf

https://www.economicshelp.org/blog/glossary/demand-for-money/