3.1 - money and banking Flashcards
definition of money
legal tender which is generally acceptable as a means of payment for goods and services
the need for money
- 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
definition of legal tender and examples
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.
list the functions of money
- medium of exchange
- store of value
- measure of value (unit of account)
- standard of deferred payment
medium of exchange
- 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
store of value
- money can be stored to be used at a later date
- money loses value over time (inflation)
measure of value (unit of account)
- measures the market value of goods/services in monetary goods
- therefore the value of goods can be compared and the worth is made clear
standard of deferred payment
- 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
list the 5 characteristics of money
- acceptability
- durability
- portability
- divisibility
- scarcity
acceptability
must be accepted by everyone in the area so that they can accept it as a form of payment
durability
should be able to last a long time in order to be able to store value
portability
easy to carry around and lightweight
divisibility
available in diff. amounts without losing value to buy goods of diff. values and give change
scarcity
must be limited in supply for people to value it
central bank
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
role of the central bank - 9 roles, only need 3
- acts as a banker to the gov.
- operates as a banker to the commercial bank
- acts as a lender of last resort
- manages the national debt
- holds the country’s reserves of foreign currency and gold
- issue bank notes
- implements the gov’s monetary policy
- controls the banking system
- represents the government
implements the gov’s monetary policy
controls inflation by controlling the money supply
- controlling interest rates, e.g. interest rates go up, people save more
- influences spending and investment
acts as a banker to the government
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
acts as a lender of last resort
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
commercial banks
aim to make a profit by providing a range of banking services to households and firms
role of a commercial bank - 4, need 3
- accepting deposits from the public
- lending to households and small businesses
- enable their customers to receive and make payments
- other banking services
accepting deposits from the public
customers can keep their money in a safe place
- current account: no interest - savings account
lending to households and small businesses
- reasons? what do they offer?
loans, overdraft, mortgages credit card
loans given for: houses, cars, travelling, studying
enables customers to receive and make payments
provides money transmission services
- wage and salary payments, direct debit
