ECO • SHS 1Term 3WAEC / WASSCE SyllabusVIP Lesson
Money, Commercial Banking & the Central Bank
Evolution and functions of money, commercial bank functions and credit creation, the Bank of Ghana, monetary policy tools, and controlling inflation.
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Real-World Context & Relevance in Ghana
The Bank of Ghana Monetary Policy Committee (MPC) meets bi-monthly to review the Monetary Policy Rate to combat inflation.
Key Syllabus Learning Objectives
- 1Evaluate the functions of money and limitations of the barter system
- 2Explain the mechanism of credit creation by commercial banks
- 3Analyze how the Bank of Ghana utilizes monetary policy instruments to stabilize the Cedi and control inflation
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Comprehensive Syllabus Study Notes
• Money & Barter:
- Barter trade suffered from the double coincidence of wants, indivisibility of goods, and lack of common unit of account.
- Functions of Money: Medium of exchange, unit of account, store of value, and standard of deferred payments.
• Commercial Banking & Credit Creation:
- Commercial banks accept deposits, advance loans, and facilitate payments.
- Credit Creation: Banks create money through fractional reserve lending: Total Money Created = Initial Deposit * (1 / Cash Reserve Ratio).
• The Central Bank (Bank of Ghana - BoG):
- Sole currency issuing authority (Ghanaian Cedi); banker to government; bankers' bank; lender of last resort; manages foreign exchange reserves.
• Monetary Policy Tools:
- Monetary Policy Rate (MPR): The benchmark lending rate BoG charges commercial banks.
- Reserve Requirements (Cash Reserve Ratio): Regulates proportion of deposits banks must hold.
- Open Market Operations (OMO): Buying/selling of treasury bills to adjust liquidity.
- Controlling Inflation: In a high inflation environment, BoG raises the policy rate and sells treasury bills to mop up excess liquidity.
- Money & Barter:
- Barter trade suffered from the double coincidence of wants, indivisibility of goods, and lack of common unit of account.
- Functions of Money: Medium of exchange, unit of account, store of value, and standard of deferred payments.
- Commercial Banking & Credit Creation:
- Commercial banks accept deposits, advance loans, and facilitate payments.
- Credit Creation: Banks create money through fractional reserve lending: Total Money Created = Initial Deposit * (1 / Cash Reserve Ratio).
- The Central Bank (Bank of Ghana - BoG):
- Sole currency issuing authority (Ghanaian Cedi); banker to government; bankers' bank; lender of last resort; manages foreign exchange reserves.
- Monetary Policy Tools:
- Monetary Policy Rate (MPR): The benchmark lending rate BoG charges commercial banks.
- Reserve Requirements (Cash Reserve Ratio): Regulates proportion of deposits banks must hold.
- Open Market Operations (OMO): Buying/selling of treasury bills to adjust liquidity.
- Controlling Inflation: In a high inflation environment, BoG raises the policy rate and sells treasury bills to mop up excess liquidity.
Practical Example:
The Bank of Ghana Monetary Policy Committee (MPC) meets bi-monthly to review the Monetary Policy Rate to combat inflation.
Core Takeaway:
If the cash reserve ratio is 10%, the credit multiplier is 1 / 0.10 = 10. An initial deposit of GH₵ 1,000 can generate up to GH₵ 10,000 in total bank credit.
WAEC / WASSCE Examiner Tips
- If the cash reserve ratio is 10%, the credit multiplier is 1 / 0.10 = 10. An initial deposit of GH₵ 1,000 can generate up to GH₵ 10,000 in total bank credit.
Common Candidate Pitfalls & Errors to Avoid
- Quoting the money multiplier as 1 divided by the cash ratio while ignoring currency drain by the public.
- Treating the central bank as the banker of the general public.
- Counting cheque creation as new money without deducting the reserves each bank must keep.
- Listing functions of the Bank of Ghana without naming lender of last resort.
- Confusing high-powered money with the broad money supply.
Topic Mastery Checklist
- Evaluate the functions of money and limitations of the barter system
- Explain the mechanism of credit creation by commercial banks
- Analyze how the Bank of Ghana utilizes monetary policy instruments to stabilize the Cedi and control inflation
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