Economics Chapter 16

Question 1

WHAT IS MONEY?

Answer 1

Money is an item which is generally acceptable as a means of payment.

The main form of money is bank account. Money can be transferred in a number of ways using bank accounts such as direct debits, credit cards and mobile phones. Though bank accounts and credit cards are accepted forms of money, they are not legal tender.

Legal tender: Money that has been accepted by the government

Question 2

WHAT ARE THE FUNCTIONS OF MONEY?

Answer 2

Medium of exchange: money ⇒ product ⇒ money

Store of value: money can be saved

Unit of account: measure of value. Helps to express and compare prices of products

Standard of deferred payment: allows people to borrow and lend

Question 3

WHAT ARE CHARACTERISTICS OF MONEY?

(PAS THE DOUBLE D’S)

Answer 3

1. PORTABILITY
2. ACCECPTABILITY
3. SCARCITY
4. DURABILITY
5. DIVISABILITY

Question 4

WHAT ARE ASSETS?

Answer 4

Financial asset: Good store of value that can be easily converted into cash in order to make payments

Liquid asset: Assets that can converted into cash in a short amount of time

Physical asset: Generally not accepted as a form of payment. Basically trading a good in exchange for another good or money

Question 5

WHAT IS INTRINSIC VALUE?

Answer 5

To act as money an item does not need to have intrinsic value. This means that it does not have to be worth something in its own right.

Question 6

WHAT ARE THE FUNCTIONS OF A COMMERCIAL BANK?

(A.L.E)

Answer 6

To accept deposits

1. Current Account- also called demand or sight account.
   Features - immediate access to money but usually no interest.
2. Deposit or time account
   Features- Money can be withdrawn after due notice, interest is paid.

To lend

1. Bank Overdraft - Enables a customer to spend more than what she has in her account up to an agreed limit. Interest is charged on amount borrowed. It is an easy way to cover short term gaps but is expensive.
2. Loan - Usually for a purpose and for a fixed period of time. Interest is charged on the money borrowed. The rate of interest is usually lower than that on overdraft. A customer may be asked to provide a security called ‘collateral’. In case of a firm, a scrutiny of accounts or business plan may be done.

To enable customers to make payments

Banks receive and make payments on behalf of its customers. This can be done by way of credit cards, standing order, direct debit and online banking. Commercial banks as financial intermediaries, effectively borrow from their customers and lend to them. As financial agents for their customers, they receive and make payments.

Question 7

WHAT ARE THE OTHER FUNCTIONS OF A COMMERCIAL BANK?

Answer 7

• Change foreign currency
• Provide safe deposit boxes for storing important documents and valuables
• Help with administration of customers’ wills
• Sell insurance
• Offer a variety of savings accounts with a range of conditions and interest rates
• Investment banking services