3.1 Money & Banking

Question 1

What are the four functions of money?

Answer 1

1. A medium of exchange (bartering not required
2. A measure of value (shows the value of a good/service)
3. A store of value (can be saved)
4. A method of deferred payment (loans/debts, can get goods now and pay in future)

Question 2

What are the six characteristics of good money?

Answer 2

1. Divisibility (e.g. notes of different value can be exchanged)
2. Acceptability
3. Durability
4. Scarcity (supply can be controlled)
5. Uniformity (e.g. all £50 notes exactly the same)
6. Portability (easy to carry/conceal)

Question 3

What are the four main roles of central banks?

Answer 3

1. Implement monetary policy
2. Banker to the government
3. Lender of last resort (banker to the banks)
4. Regulation of the banking industry

Question 4

What are the five main functions of commercial banks?

Answer 4

1. Facilitate saving
2. Lend to businesses and individuals
3. Facilitate exchange of goods/services (credit/debit cards)
4. Provide forward markets in currencies and commodities (investors can make profit speculating on future prices)
5. Provide a market for equities (shares in public companies)

Question 5

Discuss whether or not a central bank should reduce commercial bank lending.

Answer 5

On the one hand:
1. Lower lending may lower consumner spending and investment by firms.
2. This may reduce demand-pull inflation.
3. Which would make exports more competitive.
4. Which would improve the current account position.

However,
1. Lower lending may cause some firms to go out of business.
2. Which would cause unemployment.
3. It may also cause some firms to not keep up with the latest technology.
4. Which would reduce international competitiveness.