T1 Purposes Of Money

Question 1

What is money?

Answer 1

• anything that is generally accepted as means of payment
• comes in the form of cash and bank deposits

Question 2

What is barter?

Answer 2

• the exchange of goods
• way of trading before money

Question 3

What were the problems with bartering?

Answer 3

• requires a double coincidence of wants for trade to take place
• it is difficult to decide on how many units of a good should be exchanged for another

Question 4

What is an item with intrinsic value?

Answer 4

• item worth something in their own right
• the value of the item can vary e.g. price of gold has changed over the years
• also not easy to make item divisible

Question 5

How did money develop?

Answer 5

• notes and coins were created as one single medium of exchange
• they had no intrinsic value - the metal and paper had no value
• but they had represented value as it was accepted they were worth something

Question 6

What are the 8 characteristics of money?

Answer 6

• acceptable
• recognisable
• stable
• divisible
• durable
• portable
• scarce but sufficient
• homogenous

Question 7

What are the functions of money?

Answer 7

• measure value - the value of something is measure in terms of money
• make payments - means of exchange
• save - store of value - money is used to store for future use
• borrow - a means of borrowing and repaying debt

Question 8

How is money used as a store of value

Answer 8

• money can be saved and stored as wealth so that it can be spent at a later date
• the interest on money when it is saved must been equal to the rate of inflation to maintain its value

Question 9

How does money enable borrowing?

Answer 9

• if people borrow today, then they can pay back their loan in the future in a way that is acceptable to the person who made the loan
• the cost of borrowing is the rate of interest

Question 10

Specialisation

Answer 10

• money facilitates specialisation
• workers specialise then get paid a wage/salary
• with this wage workers can pay other workers for the goods and services they provide

Question 11

How does inflation affect money?

Answer 11

• inflation increases cost of living
• this is because a given amount of money can buy less - decreasing the purchasing power of money

Question 12

How can holders use current accounts?

Answer 12

• medium of exchange - e.g. make a transfer, pay by direct debit/standing order
• store of value - save money for a later date
• they can borrow using a current account e.g. overdrafts

Question 13

How children use money

Answer 13

• young children receiving an allowance are likely to spend most of their money - they may save what they receive for higher value items that they want and for unspecified items in the future

Question 14

How young adults use money

Answer 14

Young adults that have just left h9me and are earning a low wage are likely to spend most of their money on living expenses

Question 15

How adults use money

Answer 15

adults with more job experience and better wages may spend money on living expenses and ‘fun items’, borrow money through a mortgage to buy a home and save for the future

Question 16

How parents use money

Answer 16

• might borrow money to pay for items such as a family sized car
• they may sound most of their income on living expenses and gifts for their children and find it difficult to save

Question 17

How middle-aged adults use money?

Answer 17

Most likely to have paid off their debts and to be saving for their old age

Question 18

How pensioners use money

Answer 18

Retired people are more likely to be spending all their income which have fallen since their years in employment

Question 19

Who signs the amount?

Answer 19

Chief cashier of the Bank of England

Question 20

Money is said to have …. value

Answer 20

• fiduciary (faith) - this is based on trust in the banking system
• the faith will mean that sellers will receive funds transferred between bank accounts electronically

Question 21

What are the features of cash to prevent fraud?

Answer 21

• watermarks
• UV features
• complicated designs
• see through windows
• raised print

Question 22

How is money homogeneous?

Answer 22

• looks and feels the same
• makes it more recognisable and acceptable
• cash tends to have the same main features
• when cash changes, there is a lot of prewarning

Question 23

money as a unit of account?

Answer 23

• money offers a standard measure of financial value
• compare prices over time
• used in accounting and bank statements to record transactions and provides balances

Question 24

What’s legal tender?

Answer 24

Currency described as ‘legal tender’ can be used to settle or clear a debt in court

Question 25

What’s bitcoin?

Answer 25

• electronic form of currency
• decentralised - not backed by back e..g Bank of England
• hard to trace
• made anomalously

Question 26

What is purchasing power?

Answer 26

Quantity of goods and services it can buy

Question 27

How to maintain/grow purchase power

Answer 27

Interest rates which are changed in accordance to inflation

Question 28

What’s the purchasing power in other countries?

Answer 28

• the same goods can cost different amounts in different countries
• exchange rates