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FM-415-CHAPTER-3

The document provides an overview of payment systems, explaining the transition from commodity money to fiat money and how interest rates are determined. It discusses the equilibrium in the money market, the components of money interest, and the impact of changing interest rates on spending and saving behavior. The information highlights the relationship between interest rates, investment, and economic activity.

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rafaelanonuevo03
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13 views11 pages

FM-415-CHAPTER-3

The document provides an overview of payment systems, explaining the transition from commodity money to fiat money and how interest rates are determined. It discusses the equilibrium in the money market, the components of money interest, and the impact of changing interest rates on spending and saving behavior. The information highlights the relationship between interest rates, investment, and economic activity.

Uploaded by

rafaelanonuevo03
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd
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INTRODUCING THE

PAYMENT
SYSTEM:AN
OVERVIEW
INTRODUCTION
PAYMENT SYSTEM
• Money facilitates transactions in the economy. The mechanism for conducting
such transactions is called a payment system.
THE TRANSITION FROM COMMODITY
MONEY TO FIAT MONEY
COMMODITY MONEY
• refers to a good used as money that has value independent of its use
as money.
• Historically, examples of commodity money include gold, silver, tea,
alcohol, and seashells. Even if no one would accept such goods as
trade, the owners could still use them for their purposes.
HOW INTEREST RATES ARE DETERMINED
• INVESTMENT FUNDS- the rate of interest balances the demand for
funds (required for investment) and the supply for funds (from
savings). If investors can earn a 10% return on capital investment
project, they will be willing to pay a rate of interest of up to 10%.
• LIQUID ASSETS- households and businesses may have reasons to hold
assets in liquid form (ex. Readily available money)
DETERMINING THE INTEREST RATE
• At the equilibrium interest
rate, the quantity of funds
borrowers demand for
investment and consumption
now rather than later will just
equal the quantity of funds
lenders save.
MONEY MARKET EQUILIBRIUM
• Money market equilibrium occurs at
the interest rate at which the
quantity of money demanded
equals the quantity of money
supplied. All other things
unchanged, a shift in money
demand or supply will lead to a
change in the equilibrium interest
rate and therefore to changes in the
level of real GDP and the price level.
THREE COMPONENTS OF MONEY INTEREST

• The pure interest component is the real price one must pay for earlier
availability.
• The inflationary premium component reflects the expectation that the loan
will be repaid with peso of less purchasing power as the result of inflation.
• The risk-premium component reflects the probability of default (the risk
imposed on lender by the possibility that the borrower may be unable to
repay the loan).
IMPACT OF CHANGING INTEREST RATES
• Short-term interest rates are relevant for loans with a relatively short length
for repayment while long-term interest rates on the other hand, are
relevant for loans such as long-term corporate borrowing and 10-10-30 year
fixed rate mortgages.
• Every time the interest rate is changed, it sends a signal to society to either
spend or save.
• A rise interest rates encourages saving since higher interest will be paid on
money in savings accounts, and investments can grow.
• A drop in interest rates is intended to cause an increase in spending since
borrowers are able to take out loans more cheaply
Thank you

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