Money:

- Limitation:
1. Instability:
A great disadvantage of money is that its value does not remain constant
which creates instability in the economy. Too much of money reduces its
value and causes inflation (i.e., rise in price level) and too little of money
raises its value and results in deflation (i.e., fall in price level). Inflation
distorts the pattern of distribution in favour of the rich ; thus, it makes the
rich richer and the poor poorer. Deflation, on the other hand, results in
unemployment and hardships to the working class.
2. Inequality of Income:
Money, through its excessive use and inflationary effect, creates and
widens the inequalities in the distribution of income and wealth. This had
divided the society into 'haves' and 'have-nots' and has led to a class conflict
between them.
3. Growth of Monopolies:
use of money leads to the concentration of wealth in a few hands and this
gives rise to monopolies. Growth of monopolies results in the exploitation
of the workers, brings misery and degradation to them.
4. Over-Capitalization:
Easy borrowing and lending facilities, made possible through money, may
lead certain industries to use more capital than is required. This over-
capitalization, in turn, results in over-produc-tion and unemployment.
5. Misuse of Capital:
Money, which is the basis of credit, leads to the creation of more and more
credit creation. Credit creation, if not matched by the increase in
production, results in inflationary rise in the prices.
6. Hoarding:
 In the materialistic world, people give undue importance to money and,
instead of utilising in productive activities, may start hoarding. This would
adversely affect the growth of income, output and employment of the
economy.

7. Black Money:

Money, due to storability characteristic, is the cause of the evil of black

money. It provides people a convenient way to evade taxes by concealing their
income. Black money, in turn, encourages black marketing and speculative
activities.

8. Political Instability:

Wide fluctuations in prices and business activities, caused by money, may lead
to political instability. This may result in the change of government.

9. Moral and Social Evils:

In the modern times, moral values have been sacrificed at the alter of money.
People have become so much money-minded that they openly indulge in
corrupt practices to satisfy their greed for money. Money is also the root cause
of thefts, murders, frauds and other social evils.

Bank:

Why are banks important?

1. Banks are important because they loan money, accept deposits and attract
investment. Investment banks are also imperative, because these
institutions underwrite equity and debt.
2. Banks are vital to investors because the banking system acts as a control
mechanism for the flow of capital, The management of capital allows
banks to flourish financially, which raises the stock value for shareholders.
3. Investment banks play the role of intermediaries when corporate mergers
occur. The banking establishment may also provide financial consultation
and information to companies. Investment banks deal largely with such
investment endeavors as initial public offerings and private share offerings.
4. Banks offer a safe place where people can store their money, so people
don't have to carry excessive amounts of cash. Consumers also use banks
to issue wire transfers. Banks provide underwriting services by attaching
the institution's name to a transaction. For instance, a check with a bank's
name on it provides credibility and peace of mind to the person accepting
the payment. The banking sector also issues debit and credit cards for the
purchase of goods and services..
Asymmetric:
Asymmetric infor: a situation that arises when 1 party’s insufficient
knowledge abt the other party involved in a transaction make it impossible
to make accurate decisions when conducting the transaction. Ex: For
example, medical doctors typically know more about medical practice than
their patients.
This results in 2 problems:
- Adverse selection happens before the transaction: potential bad credit
risks are the ones who most actively seek out loans. Ex: wealthy people
often worry that others will seek to marry them only for their money
- Tools to help reduce:
+ Private production and sale of information: Free-rider problem occurs
when people who don’t pay for infor take advantage of infor that other
people have paid for
+ Government regulation to increase information: Not always works to
solve the adverse selection problem, explains for fact the F.System is
among the most heavily regulated sectors of the economy
+ Financial intermediation explains for fact indirect finance, which
involves the acts of F.Intermediaries, is many times more important than
direct finance, in which businesses raise funds directly from lenders in
F.Markets; F.Intermediaries, particular banks, are the most important
source of external funds used to finance businesses; Only large, well-
established corps have ez access to securities markets to finance their acts
+ Collateral and net worth explains for fact security is a prevalent feature
of debt contracts for both households & businesses
- Moral hazard happens after the transaction: called the principal-agent
problem, becoz managers (the agents) have less incentive to maximize
profits than stockholders (the principals). This explains why debt
contracts are so much more prevalent in F.Markets than equity
contracts. Ex: you be more willing to lend to a friend if she put all her
life savings into her business because she takes on too much risks, she
will have responsibility to pay off the loan
Commercial bank:
What are the principal uses of commercial bank funds? Major sources of
funds?
- The principal uses of commercial bank funds:
Commercial banks work with short-term funds. Their working capital
consists mainly of moneys deposited by customers and with drawable
by them on demand or on short notice. If a bank lends such moneys for
long periods or keeps them ‘blocked’ in any other way, it will be unable
to meet the demands of its depositors for withdrawal of cash, and will
be forced to go into liquidation.
- Major sources of funds: the major sources of funds in commercial banks
are varied.
+ Saving deposits: Deposits remain the main source of funds for a
commercial bank. The money collected can go toward paying on
interest-bearing accounts, completing customer withdrawals and other
transactions
+ Reserve funds: A commercial bank builds a reserve fund with
deposits so it can pay interest on accounts and complete withdrawals.
Ideally, a bank's reserve fund should be equal to its capital
+ Shareholders capital: Some commercial banks that trade on the stock
exchange can use shareholders' capital to receive the money it needs to
stay in business. This process is also known as equity financing. Banks
can only report the amount of capital that was initially on their balance
sheet. Appreciation and depreciation of shares do not count toward the
total sum of a shareholder's capital.
+ Retained earnings: A lot of commercial banks earn retained earnings
or fees to help fund their business. A retained earning can be collected
through overdraft fees, loan interest payments, securities and bonds.
Banks also charge fees for providing customers with services such as
maintaining an account, offering overdraft protection and also
monitoring customers' credit scores.