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L.O.1
FINANCIAL INTERMIDIARIES
L.O2 L.O.1
MONEY CREATION FINANCIAL
L.O3 INTERMIDIARIES
DEMAND FOR MONEY
L.O 4
INTEREST RATE DETERMINATION
L.O 5
FISCAL POLICIES, INTEREST RATES AND INVESTMENT

Is an Institution , Firm ,Individual who The first party provides SERVICES, and
performs intermediation between two the second party is a CONSUMER or
or more parties in a financial context. CUSTOMER.

An Institution that facilitates the

channeling of funds between lenders and TYPES OF
borrowers indirectly.
FINANCIAL INTERMEDIARIES
That is, SAVERS (lenders)-give funds to
an intermediary Institution(BANK), and
that is Institution gives those funds to
spenders (borrowers).

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1. DEPOSIT INSTITUTION
• COMMERCIAL BANKS DEPOSIT INSTITUTION
• THRIFT INSTITUTION(saving, loans association,
mutual savings bank)
• Credit union
2. NON-DEPOSIT INSTITUTION Accept deposits from people and business
• LIFE INSURANCE to use in the future
• INVESTMENT COMPANY
• CONSUMER FINANCE COMPANY
• MORTGAGE COMPANY
• CHECK CASHING OUTLET
• PAWNSHOP

COMMERCIAL BANK THRIFT INSTITUTION

- Are often called as full service FULL
SERVICE BANKS and offer a wide
range of financial service
- It offers checking accounts, savings
accounts, provide loans, and offer other
services to individuals and businesses.
two types of financial institutions are
commonly viewed in this category –
savings and loan association and multi-
purpose loan

NON-DEPOSIT INSTITUTION
CREDIT UNIONS
Not like banks, no deposit made and solely
Is a user owned, not for profit, for borrowing by means of collateral
cooperative financial institution. transactions only.
Commonly formed by people in the same
company, government agency, labor
union, profession, church or community.

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LIFE INSURANCE COMPANIES INVESTMENT COMPANIES

Offers a financial services and financial Allow people to choose investment

security such as investments and loans opportunities for long term growth of
their money

CONSUMER FINANCE COMPANIES MORTGAGE COMPANIES

It specialize in loans for household It provides loans for purchasing house or

appliances, cars and for financial other real state
emergencies

CREDIT CARD COMPANIES PAWNSHOPS

Offers buying convenience for consumers Offering small loans based on the value of
who want to delay payment for their some tangible possession such as
purchases jewelry. It commonly charge higher fees
than other lending institution

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Physical manufacturing a new

L.O2 monetary unit, such as paper
MONEY CREATION currency or metal coin

Loaning out a physical monetary

unit multiple times through
fractional-reserve lending

L.O3 Represents the desire of households and

business to hold assets in a form that
DEMAND FOR MONEY can be easily exchanged for goods and
services. In this reason the demand for
money is sometimes called as DEMAND
FOR LIQUIDITY.

TRANSACTIONS DEMAND
It is the transaction motives, in other
words, people expect to make
THREE DISTINCT CATEGORIES transactions for goods and services

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SPECULATIVE DEMAND FOR

PRECAUTIONARY DEMAND
MONEY
Refers to household money incase of This is the opportunity cost in holding the
temporary financial emergency.
money. Holding money is just one of
Example:
many ways to hold value and wealth.
Most people carry some extra cash when
they go on a vacation in case their car
breaks down.

Accdg. To KEYNES holding money is an

expression of liquidity preference.

RATES
L.O 4 It increased during good times, called economic
expansions.
INTEREST RATE
DETERMINATION This helps keep the economy from growing too fast and
suffering from inflation.

Inflation occurs when prices rise that lending becomes

more expensive.

When the economy is slowing down or contracting, it

lower the short term rates. Lower rates usually result
in more borrowing.

It describe how money supply of money

and demand for money combine to
affect the equilibrium interest rate in
an economy. Using the market model, several
important relationships between
key economic variables shown:
“Money market model”

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1. When the money supply rises(falls), the

equilibrium interest rate falls(rises)
L.O 5
2. When the price level
increases(decreases), the equilibrium FISCAL POLICIES, INTEREST
interest rate rises(falls) RATES AND INVESTMENT
3. When real GDP rises (falls), the
equilibrium interest rate rises (falls)

Fiscal policies MONETARY POLICIES

Involves changing tax rates and
Conducted by the Central Bank Reserve
government spending.
by changing the growth rate of the
It carried out by the executive and money supply.
legislative branches of government that
make policy regarding government
spending programs and taxation. It also affects interest rates but the
connection is quite complex
Handled and develop by the Governor of
the CENTRAL BANK.

NEO-KEYNESIAN
Believes that incentives affects of fiscal
intervention exists but are too small are
PERSPECTIVE OF
significant
FISCAL POLICY

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MONETARIST
Believe that the economy is inherently
stable and recommended a small
government sector to allow market
forces to operate efficiently
POST-KEYNESIAN
Believes that money growth is insufficient
Advocate some public direction of
investment

SUPPLY-SIDER
They said to have “tax cut fetishism”

Sources of deficit that matters.

Deficit that are caused by increases in

government spending are bad but deficit
that are cause by tax cut can be good if
accommodated by expansionary
monetary policy.