3.1 - Money and Banking Flashcards
Specialization
The process of concentrating on and becoming expert in a particular subject or skill
Division of Labour
Is the separation of the tasks in any economic system or organisation so that participants may specialise
Bartering
Exchange (goods or services) for other goods or services without using money
Difficulties with barter (3)
- fixing an exchange rate
- finding someone to swap with
- trying to save an abundance of resources
Four functions of money
- medium of exchange
- unit of account
- store of value
- standard of deferred payment
medium of exchange
anything that is used to determine value during the exchange of goods and services (usually money)
store of value
something that keeps its value over a period of time even if it is stored rather than used
unit of account
money measures the value of all goods and services / Money acts as a measurement of value
standard of deferred payment
money is acceptable to make purchases today that will be paid in the future
5 factors that make good money
- Acceptability
- Durability
- Portability
- Divisibility
- Scarcity
Acceptability
Anything can be used as money as long as it is generally acceptable
Durability
Any good used as money must be hard-wearing
Portability
Money should be easy to carry around
Divisibility
It must be possible to divide money of a large value into smaller values to make small purchases or to give change, without it losing value
Scarcity
A good money must be limited in supply or scarce if people and firms are to value it
Economic agents
Economic agents are economic decision makers
3 economic agents
Individuals/households, firms and the government
Individuals as an economic agent (3 examples)
buying goods and services; savings; paying rent
Firms as an economic agent (3 examples)
investing; producing products; paying salaries/wages
Government as an economic agent (3 examples)
infrastructure and transportation; providing public services; paying expenses
Financial asset
A non-physical asset whose value is derived from a contractual claim
Financial asset (3 examples)
deposits; loans; stocks
Liquid asset
An asset that can be easily converted into cash, in a short amount of time
Liquid asset (2 examples)
cash; savings account
Physical asset
Tangible asset which is either valuable in themselves or which produce value for the owner
Physical asset (2 examples)
car; house
The market for money
Is made up of all those people and organisations that want money, and all the people and organisations willing and able to supply money
Financial Institution
Businesses that provide financial services to individuals, firms and the Government
Services of Financial Institutions (name 4)
- keeping money safe
- making payments
- borrowing money
- making investments
- exchanging currencies to buy from overseas
Banks
Financial institutions that accept deposits and make loans; like any other business except they supply money; they are a financial intermediary
3 services of (commercial) banks
loans; holding money in an account; deposits
Commercial bank
A bank that offers services to the general public and to companies
Central banks
An institution that oversees and regulates the banking system and controls the monetary base
Demand for money (source)
From individuals and organisations
Supply of money (source)
Mainly from the central banking system
How do banks make money?
They gain the money from people holding the money in them, which they lend to others and gain profit from interest
Functions of commercial banks (3)
- charging interest on loans
- charging fees for the provision of other financial services
- making investments
Functions of central banks (name 5)
- issues notes and coins for the nation’s currency
- manages payments to and from the Government
- manages national debt
- supervises the banking system, regulating the conduct of banks, holding their deposits and transferring funds between them
- is the ‘lender of the last resort’ to the banking system
- manages the nation’s gold and foreign currency reserves
- operates the government’s monetary policy
Inflation
a general increase in prices and fall in the purchasing value of money
Interest rate
the proportion of a loan that is charged as interest to the borrower, typically expressed as an annual percentage of the loan outstanding
Monetary policy
policies to control the supply of money, usually by manipulation of the interest rate to control demand and therefore control inflation
Bonds
a loan from an investor to a borrower such as a company or government
Stocks
a stock (also known as equity) is a security that represents the ownership of a fraction of a corporation
Stock market
venues where buyers and sellers meet to exchange equity shares of public corporations
Debt
a sum of money that is owed or due
Loans
a thing that is borrowed, especially a sum of money that is expected to be paid back with interest
Fiscal policy
the use of government revenue collection and expenditure to influence a country’s economy
Gold standard
the system by which the value of a currency was defined in terms of gold, for which the currency could be exchanged
Open market transaction
activities undertaken by a Central Bank in order to regulate the money supply in the economy
Monetary reserves
cash and other reserve assets such as gold held by a central bank
