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Kids' Corner :  Learn About Money

Circulation of Money and the Economy

Money helps the flow of economic transactions. It makes the economy go around. When there is shortage of money, there is "tight liquidity". When too much money chases too few goods, prices go up and there is inflation. To understand how money helps an economy, we should see the circular flow of economy and the circular flow of money.

As the sole currency issuing authority in Malaysia, Bank Negara Malaysia is responsible for issuing currency to the financial institution under its supervision when they need it, and take it back when they don't.

Bank Negara Malaysia has a mint in Shah Alam (operated by the Royal Mint of Malaysia) where all our coins are minted. Our currency notes however are still being printed abroad.

When financial institutions do not have enough money of certain denominations, such as RM10 or RM50 notes, they will order the currency notes from Bank Negara Malaysia and charge it to their clearing account. When the financial institutions have more currency than is needed or safe to hold, they send it back to Bank Negara.

Over here, torn and worn notes are removed from circulation and destroyed. Usable notes are kept in a vault until they are needed again.

When we work, we receive money as salary, wages or income. We spent most of this money on goods and services such as food, clothing, transport and medical care. This money provides businesses with the means to pay for workers, materials and machines. The rest of our income may be saved into banks and finance companies.

The money that the shops, factories and farms receive as income is also saved into banks and finance companies. In return, these financial institutions may lend the money to the enterprises to help them invest in new machinery or land. They also lend money to ordinary people like you and me to help us buy houses or cars.

In this way, money flows round and round the economy. It is an important aspect of our lives, because it helps change raw materials into the things we want and need, and provide us with a way of getting them.