Money, banking and inflation
Economics · WAEC and JAMB · SS2 and SS3
Highly topical in Nigeria, which makes it a favourite for essay questions. Know the functions and the control measures precisely.
What you need to know
- Functions of money: medium of exchange, store of value, unit of account, standard for deferred payment.
- Qualities of good money: durability, portability, divisibility, acceptability, scarcity, homogeneity.
- Commercial banks accept deposits, lend, and create credit through the multiplier.
- Central Bank functions: issues currency, banker to government, lender of last resort, manages reserves, controls monetary policy.
- Monetary policy instruments: open market operations, bank rate, cash reserve ratio, liquidity ratio, moral suasion, selective credit control.
- Demand-pull inflation: too much money chasing too few goods.
- Cost-push inflation: rising costs of production push prices up.
- Effects of inflation: erodes savings, hurts fixed-income earners, encourages speculation, distorts planning.
Key terms
- Legal tender
- Money that must be accepted in settlement of a debt by law.
- Near money
- Assets easily converted to cash, such as treasury bills and savings deposits.
- Bank rate
- The rate at which the Central Bank lends to commercial banks, which guides all other rates.
- Deflation
- A persistent fall in the general price level, usually with falling output and rising unemployment.
Worked example
If the cash reserve ratio is 20 per cent, what is the credit multiplier?
- Credit multiplier = 1 / cash reserve ratio
- = 1 / 0.20
Answer: 5, so an initial deposit can support five times its value in credit
The mistake to avoid
Inflation is a persistent RISE in the general price level, not simply high prices. A single price increase is not inflation.
In the exam
When asked to control inflation, separate monetary measures (Central Bank) from fiscal measures (government taxation and spending). Mixing them loses structure marks.