Microeconomic decision makers

Question 1

Why do we need money?

Answer 1

We need money in order to promote specialisation of labour in different fields.

Question 2

What is barter?

What are the problems with bartering or the disadvantages of bartering?(*4)

Answer 2

1. Exchanging of one good or service for another is known as the barter exchange system.
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2. Fixing rate of exchange: if I sold cheese then as to represent the cost of the cheese I would have to mention on a board or remember the equivalent of 1kg of cheese in terms of pencils, meat, tables…and the list will go on.
3. The need of double coincidence of want: this means that if I am a cheese maker and seller and I am going out to buy meat I will have to find someone who is willing to sell meat and also is in need of cheese.
4. Trying to save will be difficult: A carpenter can save a desk provided he/ she has a big warehouse which will be expensive and then on the other hand the idea of saving milk or meat would would be impossible and they would soon get spoilt.
5. Lack of divisibility: a person can’t divide the parts of a table and exchange them with other goods and services as dividing the table will kill the use of the table as well.

Question 3

What the function of money?(*4)

Answer 3

1. Money is a medium of exchange: this is because it will eliminate the need of double coincidence of want. This is because it will generally be accepted in exchange for other good sand services.
2. Money is a unit of account: just like thermometer measures temperature money measures the store of value
3. Money is a good store of value:An item that people can use to transfer purchasing power from the present to the future. Unlike tables and chairs money would not take a lot of space to the saved, and also unlike meat I would last for a long time.
4. Money is a medium of deferred(future) payments: postponement of payments in the the future. It makes it possible to loan, pay in instalments etc. in barter if a dozen of apples in exchanged with 1kg of meat it will be hard to pay in investments as they would have to decide upon the size and weight of the apples and many other things.

Question 4

What are the characteristics of money?(*5)

Answer 4

1. Acceptability: Money should be something that people are prepared to accept to buy and sell goods with. You can’t buy a goat if the person doesn’t want your chickens.It is excepted in exchange of many goods. the same $1 can be exchanges for a bottle of water and for a chocolate bar.
2. Durability: they can be stored and they are durable if money would melt in the pocket it would be useless.
3. Portability: Money can easily fit in the pocket. Unlike a table it is easier to carry cash/ coins around.
4. Divisibility: We can offer change or smaller denominations. Half a painting can spoil the look of the painting.
5. Scarcity: Good money should be scarce as if gravel and stones would be a medium of exchange anyone can pick it up from the ground and become rich.

Question 5

What is meant by token money?

Answer 5

Token money is a type of money wherein the medium or the material of the money is less worth than the face value. eg: a $100 note is on the face value but it is only a pice of paper that is worth much less than the face value.

Question 6

What makes up the money supply?

Answer 6

Notes and coins, and deposits with banks and other financial institution therefore makes up the money supply in an economy.

Question 7

What is division of labour?

Answer 7

The specialisation of workers in the provision of goods and/or services by breaking a job down into particular roles or components that are repeated by the same workers.

Question 8

What are financial assets?

Answer 8

Non-physical assets, such as bank deposits, shares, bonds and other financial claims that have value.

Question 9

What are liquid assets?

Answer 9

Financial assets that are near money, that is, that can be easily converted into cash

Question 10

What is a near money?

Answer 10

It is a term for assets that can be easily converted into cash.

Question 11

What are physical assets?

Answer 11

It accounts for the goods that can be sold for money like antiques or collectibles.

Question 12

What is meant by the velocity of the circulation of money?

Answer 12

The velocity of circulation of money accounts for the number of times money is exchanged ore passes form one holder to another in any given period.

Question 13

What are financial institutions?

Answer 13

Organisations such as Banks, and Stock Brokerages, and Credit Card Companies, that lend money, or provide advice and assistance in financial investments are termed to be as financial institutions.

Question 14

What are bank deposits?

Answer 14

It is the money placed into banks for safekeeping.It is kept in different types of deposits among which are current accounts, savings account etc.

Question 15

What is a money market?

Answer 15

It is made up of people and organisation that want money, an all the people and organisation that are willing and able to supply money.

Question 16

What are banks?

Answer 16

Banks are financial intermediary, that therefore brings customers who want to save money and the consumers who want to borrow money.

Question 17

What are financial intermediaries?

Answer 17

Financial institutions through which savers can indirectly provide funds to borrowers.

Question 18

What is an interest rate?

Answer 18

The percentage paid to the lender for the use of the borrowed money.

Question 19

How do banks earn money?(*3)

Answer 19

1. By the difference in the interest rates: normally bin a bank the interest rate of borrowing money is higher than the deposit interest rate. eg: loan=$100 with 10% p.a., and deposit=$100 with 7.5% p.a., 5 then the profit for the firm in this scenario would be the $2.5.
2. Charging fees for the provision of other financial services: Eg: withdraws from ATM’s, exchanging and transferring foreign currencies, buying and selling shares, providing insurances, issuing of credit and debit cards, storing valuables, organising customer payments through online transfer facilities and cheques, locker rents, internet banking services etc.
3. Making investments: As every banking unit or company has deposits it uses them to invest in buying g shares of public limited companies. the risk for banks is very less as it normally has experts hired that can invest thus making the chance of losing money low.

Question 20

List the five types of banks?

Answer 20

1. Commercial Banks
2. Credit Unions
3. Mutual Societies
4. Investment Banks
5. Islamic Banks

Question 21

Explain what a commercial bank is?

What Services are provided?(*7)

Answer 21

A commercial bank is also known as a high street bank that is available to the general public and has branches in a number of places within in a city or a town.

1. accepting deposits of money and savings
2. making personal and commercial loans
3. buying and selling shares for customers
4. providing insurance
5. operating pension funds
6. providing financial and tax planning advice
7. exchanging foreign currencies

Question 22

What are Credit Unions?

Answer 22

A credit union is a cooperative, not-for-profit organisation, owned by and for its members.Credit Unions were started by people who worked or lived together to provide low cost loans.

Question 23

What are Mutual Societies?

Answer 23

They are owned and run on behalf of their members or customers. Traditionally they provide mortgages to buy property but now offer many commercial bank services.

Question 24

What are Investments banks?

Answer 24

These banks specialise in helping large business organisations raise finance to fund their operation and expansion, usually through helping them to issue and sell stocks and shares on the stock market. They also give advice on company mergers and takeovers.

Question 25

What is an Islamic Bank?

Answer 25

An Islamic bank is a Bank that is based on the principles of the Sharia Laws that forbids interest charges and payments.These banks instead charge a fee for other services such as banking services etc.

Question 26

Explain the 3 types of accounts?

Answer 26

1. Deposit Account: A type of current account, savings account or another type of bank account which allows the money to the deposited or withdrawn.
2. Current account/ checking account: This is used by an account holder for everyday transactions, most people will have their weekly or monthly wages or salaries paid directly to this type of account.
3. Savings account: is a safe place to store the savings. Interest will usually be added based on the amount of the savings and hoe often can i withdraw money.

Question 27

Explain the 4 types of loans?

Answer 27

Overdraft: allows bank customers to overdraw their bank account by an agreed amount. It provides a small-term loan. for example unexpected bills

personal loan: is repaid with interest over a fixed period of time usually between 6 months and 10 years.

commercial loan: is a loan to a business to pay for operating costs and the purchase of materials and machinery. The loan is repayable over a fixed period of time.

mortgage: is a long term loan often up to 25 years in order to buy property.

Question 28

Explain the 5 methods of payments?

Answer 28

Cash: this accounts for notes and coins, it is the easiest way purchase items on a daily basis that cost less.

Direct Debit: this is the easiest way to make payments on a monthly basis. Once setup the bank will make the payments directly on your behalf. eg: electricity bill

Cheque: this is a written promise to transfer money to the bank account of the other person. the person receiving it can deposit the cheque in the bank and the bank will transfer the denoted amount to the bank account it is addressed to .

Debit card: it is an electronic method of payment. once the card is swiped or tapped on the payment machine the amount entered will be transferred to the account of the person in the name of which the machine is registered.

Credit card: A credit card has the same functioning as a debit card but the only difference is that once we swipe or tap the card a short term loan is established on the amount of the purchase. This is to be within a month and if the amount is neither available on the account nor is added to the the account by the end of the loan time period a high interest loan is charged until the money is paid.

Question 29

What is a central bank?

What is the role of the central bank?(*6)

Answer 29

A central Bank is the centre of the banking system in most of the economies. the main function of the central bank is to maintain the stability of the national currency and the money supply. In most of the countries the central bank is owned by the government and run by a public cooperation.

1. It issues notes and coins for the nation’s currency: Normally the central bank will have the exclusive power to issue new notes and coins that can replace the old worn out notes and coins.
2. It manages the payments to and from the government
3. It manages the national debt: A central bank can issue and repay public sector debt on the behalf of the government.
4. It supervises the banking system, regulating the conduct of banks, holding their deposits and transferrin g funds between them: It can set the rules for a commercial bank to make sure that the banks conduct their business properly. It also is the bank to the banks, meaning it holds the deposits of banks and does any transaction between them to settle the cheques paid, online transactions etc
5. It is the ‘lender of the last resort’ to the banking system: A central bank will lend money to the commercial banks if the bank runs into difficulties and it does so to keep the bank from getting bankrupt.
6. It manage the nation’s gold and foreign currency reserves:
7. It operates the governments monetary policy: