Money, Banking and Financial Institutions
Money and banking tests the functions and qualities of money, credit creation, the role of the central bank and commercial banks, and inflation. In Cameroon, the central bank is BEAC, which issues the CFA franc for CEMAC and conducts monetary policy within the fixed peg to the euro.
Money and its functions
Money is anything generally accepted as payment. It acts as a medium of exchange, unit of account, store of value and standard of deferred payment. Good money should be acceptable, divisible, portable, durable, homogeneous and relatively scarce. Money supply includes currency held by the public plus bank deposits; M1 is narrow money, while broader measures add savings and time deposits.
Banking and credit creation
Commercial banks accept deposits, lend, facilitate payments and create deposits through lending. If the reserve ratio is r, the simple credit multiplier is 1/r. A higher reserve ratio or cash leakages reduce credit creation. BEAC issues currency, acts as banker to government and banks, manages reserves, is lender of last resort and sets monetary policy. It does not provide retail banking to households.
Inflation
Demand-pull inflation comes from excess aggregate demand; cost-push from rising input costs. The quantity theory MV = PT links money supply and prices. Inflation redistributes income, harms savers and fixed-income earners, and creates uncertainty. BEAC may tighten credit to control inflation, but the fixed exchange rate limits independent policy.
Worked example
A customer deposits 200,000 CFA in a bank and the reserve ratio is 10%. The simple multiplier is 1 ÷ 0.10 = 10. Total deposits potentially created in the banking system = 200,000 × 10 = 2,000,000 CFA. New lending can therefore be about 2,000,000 − 200,000 = 1,800,000 CFA, assuming no cash leakages. If the reserve ratio rises to 20%, the multiplier falls to 5 and total deposits fall to 1,000,000 CFA.
Traps that cost marks
Do not say commercial banks print currency; do not describe BEAC as a retail bank; do not confuse legal tender with any store of value; and do not calculate the multiplier as reserves divided by deposits. Also distinguish inflation (a sustained rise in the price level) from a one-off price increase.