3.1 - money and banking

Question 1

definition of money

Answer 1

legal tender which is generally acceptable as a means of payment for goods and services

Question 2

the need for money

Answer 2

• overcomes the problems of barter
  
  • coincidence of wants –> how to measure the value of different goods
  • provides a fixed rate of exchange between other goods
• allows individuals, producers and the gov. to exchange/trade w/ each other
• enables individuals to specialise in diff/ jobs to use the money to buy different goods/services

Question 3

definition of legal tender and examples

Answer 3

a medium of payment recognised by a legal system to be valid for use within a country
- notes, coins and value stored in electronic form (e.g. octopus, credit card, debit card) issued by the gov.

Question 4

list the functions of money

Answer 4

1. medium of exchange
2. store of value
3. measure of value (unit of account)
4. standard of deferred payment

Question 5

medium of exchange

Answer 5

• overcomes the problem of coincidence of wants
• everyone accepts money in payment and it can be used to exchange for labour, which in turn can be exchanged for goods/services

Question 6

store of value

Answer 6

• money can be stored to be used at a later date

- money loses value over time (inflation)

Question 7

measure of value (unit of account)

Answer 7

• measures the market value of goods/services in monetary goods
  
  • therefore the value of goods can be compared and the worth is made clear

Question 8

standard of deferred payment

Answer 8

• allows people to borrow and lend
• someone can borrow money from someone who doesn’t want to use it
  
  • the amount can be paid back in the future

Question 9

list the 5 characteristics of money

Answer 9

1. acceptability
2. durability
3. portability
4. divisibility
5. scarcity

Question 10

acceptability

Answer 10

must be accepted by everyone in the area so that they can accept it as a form of payment

Question 11

durability

Answer 11

should be able to last a long time in order to be able to store value

Question 12

portability

Answer 12

easy to carry around and lightweight

Question 13

divisibility

Answer 13

available in diff. amounts without losing value to buy goods of diff. values and give change

Question 14

scarcity

Answer 14

must be limited in supply for people to value it

Question 15

central bank

Answer 15

owned by the government to provide banking services to the government and commercial banks and operates monetary policy

is independent from gov influence due to their political incentives

Question 16

role of the central bank - 9 roles, only need 3

Answer 16

1. acts as a banker to the gov.
2. operates as a banker to the commercial bank
3. acts as a lender of last resort
4. manages the national debt
5. holds the country’s reserves of foreign currency and gold
6. issue bank notes
7. implements the gov’s monetary policy
8. controls the banking system
9. represents the government

Question 17

implements the gov’s monetary policy

Answer 17

controls inflation by controlling the money supply

- controlling interest rates, e.g. interest rates go up, people save more
    - influences spending and investment

Question 18

acts as a banker to the government

Answer 18

tax revenue is paid into the gov’s account at the central bank, where payments for goods + services are made

central bank also manages the national debt

- carries out borrowing
- pays interest on loans and repays them

Question 19

acts as a lender of last resort

Answer 19

lends to commmercial banks that are short of cash so that they do not collapse, as it can harm the economy
- will lend money when no other financial institutions are willing

Question 20

commercial banks

Answer 20

aim to make a profit by providing a range of banking services to households and firms

Question 21

role of a commercial bank - 4, need 3

Answer 21

1. accepting deposits from the public
2. lending to households and small businesses
3. enable their customers to receive and make payments
4. other banking services

Question 22

accepting deposits from the public

Answer 22

customers can keep their money in a safe place

- current account: no interest
- savings account

Question 23

lending to households and small businesses

- reasons? what do they offer?

Answer 23

loans, overdraft, mortgages credit card

loans given for: houses, cars, travelling, studying

Question 24

enables customers to receive and make payments

Answer 24

provides money transmission services

- wage and salary payments, direct debit

Question 25

how to encourage saving

Answer 25

• high rate of interest
• advertising
• more branches
• internet banking
• scheme to protect savers
• variety of saving schemes