Chapter 16 Money and Banking

Question 1

Define money

Answer 1

An item which is accepted as means of payment

Question 2

Forms of money (3)

Answer 2

Electronic money

Coins

Notes

Question 3

Characteristics of money (5)

Answer 3

Portable

Homogeneous - Every coin/note retains the same value

Durable

Dibisible - Money can be divided into units of different values

Recognisable - Everyone should be able to tell what they are seeing is money

Question 4

Functions of Money (4)

Answer 4

Medium of exchange - Allows people to make trades and exchanges

Store of value - Allows people to save as money doesn’t deteriorate in the future

Unit of account - Allows people to understand what something is worth

Standard of deferred payments - Allows for moeny to be borrowed and lent and for it to be repaid in the future

Question 5

Define commerical banks

Answer 5

Bank which aims to make profit by providing a range of banking services to households and firms

Question 6

Functions of commerical banks (4)

Answer 6

Accept deposits
- Secure place to put money
- Households and firms earn interest

Lend money
- Households may borrow money through credit cards, mortgages, or loans

Enable customers to make payments
- Through credit card + online banking apps, debit cards

Provide financial advice + exchange different currencies

Question 7

Aims of commerical banks (2)

Answer 7

make profit by charging interest on loans

Ensure liquidity (turning assets into liquid money quickly)
- Make sure banks can meet consumer’s request to withdraw money
- Balance between profitability and liquidity (high interest but illiquid vs low/no interest but liquid)

Question 8

Define central banks

Answer 8

Government owned bank that provide banking services to commerical banks and the government and operates monetary policies

Question 9

Role of Central Banks (4)

Answer 9

Maintain stability and confidence in financial system
- Loan to commerical banks with liquidity problems
-Regulate financial systems in order to reduce risk

Manage national debt
- Carry out borrowing on behalf of the govt through govt securities (eg: govt bonds)

Print money
- Make sure it’s difficult to copy
- Control inlation/deflation by controlling money supply

Represent Govt
- Tax revenue from govt goes to govt account in Central Bank
-Payments through govt made out of this acc
- Global meetings involving central banks