1.1.5 Functions of Money

Question 1

What are the Main Functions of Money

Answer 1

• A medium of exchange: Money is any asset widely acceptable as a medium of exchange. It facilitates transactions between buyer & seller.
• Money promotes the specialisation and the division of labour which require a means of exchanging goods and services.
• A store of value: An asset that holds value over time.
• A unit of account: A nominal unit of measure used to value/cost products, assets (including property), debts, incomes and spending.
• A standard of deferred payment: The accepted way, in each market, to settle a debt.

Question 2

What are the Characteristics of Money?

Answer 2

• Durability - it needs to last.
• Portable - easy to carry around, convenient, easy to use.
• Divisible - money can be broken down into smaller denominations to facilitate purchases
• Hard to counterfeit - cannot easily be faked or copied by fraudsters.
• Accepted - money must be accepted as legal tender by a population, there must be sufficient trust in money.
• Valuable – it generally holds value over time and is not destroyed by the effects of rapid / hyper-inflation.

Question 3

What are the Forms of Money in a Modern Economy?

Answer 3

• Cash: Notes or coins issued by the Bank of England with the permission of the government. In the UK it is an almost perfect medium of exchange. Inflation affects three of the functions of money – the store of value, measure of value and the method of deferred payment.
• Money in Current Accounts: Cash can be withdrawn on demand from the account if it is in credit. So, deposits can be immediately converted into money if the account holder so wishes.
  Current account holders are provided with a debit card and cheques, can be used to purchase goods and services. It is not perfect as individuals and businesses can refuse to accept cheques and debit cards for transactions. Little interest offered on current account deposits so lose value over time with inflation.
• Near Monies: They act as mediums of value and stores of value but cannot be used as mediums of exchange. But, they are convertible into a medium of exchange quickly and at little cost.
  The most obvious type of near monies in UK is time deposits with banks and building societies. They pay higher interest rates than current accounts, they are used for saving money than making transactions.
• Non-Money Financial Assets: All financial assets can be converted into money. There are penalties for doing so – Long waiting time for withdrawal, Considerable loss of money from conversion
• Money Substitutes: Credit cards have become increasingly popular over the past 40 years as a medium of exchange. It is not a store of value, the card only represents the ability to borrow money instantly.

Question 4

What is Digital Money?

Answer 4

• Digital money / electronic money / digital currency, refers to a form of currency that exists solely in electronic or digital form, it does not have a physical counterpart like paper money or coins.
• Digital money is used for various types of transactions, including online purchases, electronic fund transfers, digital payments, and peer-to-peer transfers.
  E.g. Digital Wallets: Mobile payment apps and digital wallets, like PayPal, Apple Pay + digital banking apps
  Cryptocurrencies: Such as Bitcoin & Ethereum
  Central Bank Digital Currencies (CBDCs): Some central banks are exploring the idea of issuing digital versions of their national currencies.
  Prepaid Cards

Question 5

What has been the Growth of Digital Money?

Answer 5

• Convenience: Digital money eliminates the need for physical cash or in-person visits to banks. Mobile money technologies have accelerated.
• Globalisation: Digital money facilitates rapid cross-border payments.
• Security: Many digital money systems incorporate robust security measures, including encryption and authentication, to protect users’ financial information. These security features reduce the risk of fraud, theft, and counterfeiting.
  COVID-19 Pandemic: The pandemic prompted more people to embrace contactless payment methods to reduce the risk of virus transmission.

Question 6

What is Crypto Currency?

Answer 6

• A cryptocurrency is a type of digital or virtual currency that uses cryptographic techniques to secure transactions, control the creation of new units, and verify the transfer of assets.
• Unlike traditional currencies issued by governments (known as fiat currencies), cryptocurrencies operate on decentralised, distributed ledger technology called blockchain.
• Blockchain is a distributed and immutable ledger that records all transactions in a transparent and secure manner.
• Many cryptocurrencies have a predetermined supply cap, which means there is a maximum number of units that can ever be created.