Topic 1 - Purposes of Money

Question 1

What is money?

Answer 1

Something that is widely accepted as a means of making payments

Question 2

What is cash?

Answer 2

Coins and notes

Question 3

What is described as money?

Answer 3

Coins, notes, electronic balances in bank accounts

Question 4

Why do we have cash?

Answer 4

To make payments

Question 5

What forms can payments make?

Answer 5

Spending it, paying it into a savings account, giving it to another person, repaying it

Question 6

What is the purpose of money?

Answer 6

Making payments, setting the price of goods, storing money for the future, borrowing it (as long as it’s repaid later)

Question 7

What was used before money?

Answer 7

System of barter to trade goods or services

Question 8

What are limitations of a barter system?

Answer 8

1. Relies on the two people trading to have what the other person wants
2. Relies on an acceptable rate of exchange for both people which can be time consuming
3. Relies on the 2 people having surplus items if they want extra materials (though they can just use what they need)

Question 9

What did limitations of a barter system lead to?

Answer 9

Local communities using an item they all valued as a means of payment, which has existed for 8000-11000 years

Question 10

What is an advantage of using an item everyone values as a form of payment?

Answer 10

People can sell surplus or specialist goods they use for this item, which can be used to buy other goods

Question 11

What are some disadvantages of early forms of money?

Answer 11

1. Durability issues (animals and plants)
2. Some items can’t be divided into small amounts to make low value purchases
3. Portability issues
4. Value of the item can vary so it’s not stable

Question 12

What is intrinsic value?

Answer 12

An intermediate item that has value in its own right

Question 13

What is represented value?

Answer 13

An item with low value symbolising an item with high value, giving the item with low value a high value

Question 14

What is Local Exchange Trading Systems/Schemes (LETS)?

Answer 14

A local network that enables people to exchange food and services to each other without using money

Question 15

What are the 8 features of money?

Answer 15

1. Acceptability
2. Recognisability
3. Stability
4. Divisibility
5. Durability
6. Portability
7. Scarcity and Sufficiency
8. Homogeneity

Question 16

What is the acceptability of money?

Answer 16

People are only willing to accept money if they are confident that others will accept money from them as payment in future transactions

Question 17

How is money transferred?

Answer 17

1. Debit and Credit cards
2. Payment cards
3. Cheques

Question 18

What is the recognisability of money?

Answer 18

Money must be recognisable so that people are sure they are receiving genuine coins and banknotes, with features being introduced to prevent forgery of banknotes (doesn’t apply to money from a bank account)

Question 19

What is the stability of money?

Answer 19

Money needs to hold its value so that people are confident that the money they receive has a similar value in the future

Question 20

What is inflation?

Answer 20

When the general level of prices in an economy rise, making the value of money fall

Question 21

What is the divisibility of money?

Answer 21

Coins and banknotes must have different variations so that people can use them in different combinations to make transactions of different sizes (doesn’t apply to money from a bank account)

Question 22

What is the durability of money?

Answer 22

Coins and banknotes need to be durable enough to be used many times before they are replaced (UK coins are made from metal alloys, doesn’t apply to money from a bank account)

Question 23

What is the portability of money?

Answer 23

People must be able to carry coins and banknotes that they need, and payment mechanisms like debit and credit cards

Question 24

What is the scarcity and sufficiency of money?

Answer 24

Making sure there is the right amount of cash as too much can lead to inflation, which makes the value of money fall

Question 25

What is the homogeneity of money?

Answer 25

Coins and banknotes need to look and feel the same (in terms of shapes and main features), which helps them to be recognisable and acceptable

Question 26

What do people use money for?

Answer 26

Measure value, make payments, save money, borrow money