Chapter 16 Money and banking

Question 1

What is money?

Answer 1

A medium of exchange of goods and services.

Question 2

The functions of money

Answer 2

• medium of exchange
• store of value
• unit of account
• standard of deferred payments

Question 3

explain medium of exchange

Answer 3

Products are exchanged for money and that money is used to buy other products.

Question 4

explain store of value

Answer 4

Acting as a store of value means that money can be saved and it does not deteriorate with time and hence will be acceptable
in the future.

Question 5

explain unit of account

Answer 5

Money can also be used to place a value on an item. enables buyers and sellers to agree on what items are worth, relative to each other.

Question 6

explain standard of deferred payments

Answer 6

money is to act as a standard of deferred payments. This means that
money allows people to borrow and lend.

Question 7

The characteristics of money

Answer 7

• durable (will last some time)
• portable (can be carried around easily)
• divisible (can be divided into units of different values)
• homogeneous (every note or coin of the same value should be exactly the same)
• recognisable (people can easily see that the item is money).

Question 8

Commercial banks

Answer 8

banks which aim to make a profit by providing a range of banking services to households and firms

Question 9

what are the two ways Deposits can be made into the bank account.

Answer 9

1- **demand account or sight account **: easy and immediate access to money in this type of account, but usually interest is not paid on money held in such an account. Customers use current accounts mainly to receive and make payments.

2- **deposit or time account: ** A period of notice often has to be given before money can be withdrawn from this account. Interest is paid on any money held in a deposit account and customers use deposit accounts as a way of saving.

Question 10

two main ways of borrowing from a bank

Answer 10

overdraf -
* This enables a customer to spend more than what is in her or his account, up to an agreed limit.
* Interest is charged on the amount borrowed.
* expensive way
* mainly used to cover short-term gaps between expenses and income

loan-
* usually for a particular purpose and for a particular period of time. *Interest is charged on the full amount of the loan but the rate of interest is likely to be lower than that on an overdraft.

Question 11

functions of commercial banks

Answer 11

• Accept deposits in the form of savings.
• Aid customers in making and receiving payments via their bank accounts.
• Give loans to businesses and private individuals.
• Buying and selling shares on customers’ behalf.
• Provide insurance (protection in the form of money against damage/theft of personal property).
• Exchange foreign currencies.
• Provide financial planning advice.

Question 12

The aims of commercial banks

Answer 12

aims
1. to make profit.
2. liquidity- being able to turn assets into cash quickly without a loss.

Question 13

define central bank

Answer 13

that governs all other commercial banks in a country.

Question 14

Functions of a central bank

Answer 14

• It issues notes and coins of the national currency.
• It manages all payments relating to the government.
• It manages national debt.
• It is the lender of ‘last resort’ to commercial banks.
• It manages the country’s gold and foreign currency reserves.
• It operates the monetary policy in an economy