chapter 3

Question 1

Functions of money

Answer 1

• Medium of exchange
• Store of value
• Unit of account
• Method of differed payment

Question 2

A Medium of Exchange

Answer 2

• Without money, it’s necessary for buyers & sellers to barter
• Bartering is problematic as it requires two people to want each other’s goods
• Money easily facilitates the exchange of goods as no double co-incidence of wants is necessary

Question 3

Unit of account

Answer 3

• Money provides a means of ascribing value to different goods and services
• Knowing the price of a good in terms of money allows both consumers and producers to make decisions in their best interests
• Without this measure it is difficult for buyers & sellers to arrange an agreeable exchange

Question 4

Store of value

Answer 4

-Money holds its value over time
- This means that money can be saved
- It remains valuable in exchange over long periods of time

Question 5

A Method of Deferred Payment

Answer 5

• Money is an acceptable way to arrange terms of credit (loans) & to settle any future debts
• Allows producers & consumers to acquire goods in the present & pay for them in the future

Question 6

Characteristics of money

Answer 6

• Acceptability
• Divisibility
• Portability
• Scarcity
• Uniformity
• Durability

Question 7

Divisibility

Answer 7

To be a valued medium of exchange, currency must be divisible

Question 8

Acceptability

Answer 8

Currency must be valued & widely accepted by society as a valid way to pay for goods/ services

Question 9

Durability

Answer 9

Currency must be robust, not easily defaced/destroyed & last for a long period of time

Question 10

Scarcity

Answer 10

Supply of the currency should be such that is remains desirable & retains its value in the market

Question 11

Uniformity

Answer 11

In order to be a valid measure of value each denomination must be exactly the same e.g. every $50 note must be exactly the same

Question 12

Portability

Answer 12

Good currency is easy to carry/conceal

Question 13

Functions of Central Banks

Answer 13

Central Banks play a vital role in maintaining stability in the financial system.
Policy tools at their disposal help to meet Government economic objectives & create economic growth

Question 14

Central Banks play four important roles in the economy

Answer 14

• Implementation of monetary policy
• Banker to govt.
• Regulation of banking industry
• Banker to Banks

Question 15

Banker to govt.

Answer 15

The Govt. sets the annual budget but it is the Central Bank that manages the tax receipts & payments

Question 16

Banker to the banks – lender of last resort

Answer 16

• Commercial banks are able to borrow from the Central Bank when they run into short-term liquidity issues.
• Without this help, they might go bankrupt leading to instability in the financial system - & a potential loss of savings for many households.

Question 17

Regulation of the banking industry

Answer 17

High level of asymmetric information in financial markets requires that commercial banks are regulated in order to protect consumers

Question 18

Functions of Commercial Banks

Answer 18

• They facilitate saving
• They lend to businesses & individuals
• They facilitate the exchange of goods & services
• They provide forward markets in currencies & commodities
• They provide a market for equities

Question 19

Facilitate for businesses

Answer 19

storing money for future use is essential for households & firms. It also provides a pool of money that financial institutions can lend i.e. one person’s savings is another person’s borrowing

Question 20

They lend to businesses & individuals

Answer 20

access to credit is a key requirement for economic growth & development. Being able to borrow money speeds up consumption by households & investment by firms. It also allows households or firms to purchase assets & pay them off over an extended period of time e.g. mortgages on home purchases

Question 21

Facilitate the exchange of goods & services

Answer 21

Each purchase of goods/services requires the movement of money between at least two parties.
Commercial Banks provide multiple ways for this exchange to happen including phone apps (e.g. Google Pay), debit cards, credit cards & bank transfers

Question 22

provide forward markets in currencies & commodities

Answer 22

Forward markets are also called futures markets.
They provide some price stability in commodity markets & enable investors to make a profit by speculating on future prices

Question 23

provide a market for equities

Answer 23

Equities are shares in public companies that are listed on stock exchanges around the world. Commercial Banks facilitate both long term investment & speculation by providing platforms which connect buyers & sellers