Purposes Of Money

Question 1

Define money

Answer 1

Anything that is widely accepted as a means of making payments

Question 2

What constitutes money?

Answer 2

Coins
Notes
Electronic balances of bank accounts

Question 3

Define bartering

Answer 3

The trading of goods of services

Question 4

What are the limitations of bartering?

Answer 4

Relies on a ‘double coincidence of wants’

Relies on the two people agreeing a rate of exchange

Question 5

What are items that have been used as money in the past?

Answer 5

Rice (Japan)
Cattle / grain
Pigs
Stones
Salt
Vodka

Question 6

Issues with using items for money

Answer 6

Some items aren’t durable e.g. Pigs die

Not easily portable e.g. Fei stones

The value of the item itself can vary e.g. When gold is scarce the value rises

Question 7

Give an example of when people traded using items that represent value as money

Answer 7

In China, spades and knives has an intrinsic value.

Later coins in the shape of spades and knives to represent standard value

Question 8

Where is bartering still used today?

Answer 8

Informal bartering between friends / neighbours
Bartering websites
Local exchange trading systems (LETS)

Question 9

What is LETS?

Answer 9

A local network that allows people to exchange goods and services with each other without using money.
Trade using credits

Question 10

What are the features of money?

Answer 10

Acceptable
Recognisable
Stable
Divisible
Durable
Portable
Scarce but sufficient
Homogenous

Question 11

Define acceptable

Answer 11

Coins and notes are accepted if people have faith that they are worth their face value

Question 12

Define recognisable

Answer 12

Cash must be recognisable so that people are confident they are receiving genuine coins and banknotes
E.g. U.K. 20p coin has 7 sides, watermarks

Question 13

Define stable

Answer 13

Money needs to hold its value so people can be confident that the money they accept now will hold the same or a similar amount in the future.
Affected by inflation

Question 14

Define divisible

Answer 14

Cash must be provided in a variety of denominations so that people can use different combinations to make transactions of different sizes

Question 15

Define durable

Answer 15

Coins and banknotes need to be strong enough to be used many times before they need to be replaced by the Royal Mint or the Bank of England

Question 16

Define portable

Answer 16

People must be able to carry the cash they need for everyday use

• > why larger amounts are paper based.
• > chèque books
• > debit cards

Question 17

Define scarce but sufficient

Answer 17

The Bank of England manages the supply of cash in the economy so that there is enough for people’s transaction needs.
Too much cash -> inflation ( value of money falls )

Question 18

Define homogenous

Answer 18

All coins and banknotes of a certain denomination need to look and feel the same -> recognisable and acceptable

Question 19

What are the functions that money must perform?

Answer 19

A unit of account
A means of exchange
A store of value
A means of borrowing and then repaying debt

Question 20

Why must money be a unit of account?

Answer 20

Money offers a standard measure of financial value.
E.g. Value of goods/services/financial assets a person owns.
Allows people to compare prices between goods

Question 21

Why must money be a means of exchange?

Answer 21

Money allows people to make payments.

Certain coins and banknotes are legal tender

Question 22

Why must money be a store of value?

Answer 22

Money is used to store financial value for future use

Question 23

Why must money be a means of borrowing and then repaying the debt?

Answer 23

People can borrow money to buy goods now that they cannot afford out of current income. -> deferred payment

Question 24

Define purchasing power of money

Answer 24

The quantity of goods and services the money can buy

Question 25

How does inflation affect the purchasing power of money?

Answer 25

Inflation reduces purchasing power

Question 26

How can savers maintain or grow the purchasing power of their money?

Answer 26

By finding a savings interest rate that is higher than the rate of inflation

Question 27

What factors affect the cost of the same goods in different countries?

Answer 27

Cost of living
Wage rates
Taxation

Question 28

Where is the majority of money held?

Answer 28

In bank accounts

Question 29

Which providers offer current accounts?

Answer 29

Banks
Building societies
Post office

Question 30

What can be done with a current account?

Answer 30

Deposit money
Make payments
Withdraw cash
Issue instructions to provider e.g. Cheques, standing orders, payment card transactions

Question 31

How do people monitor the value of their current account?

Answer 31

Statements

Question 32

What is shown on the current account statement?

Answer 32

Incoming and outgoing transactions

Balance at the end of the accounting period

Question 33

How can people access their current account statement?

Answer 33

Paper based
Electronically e.g. Computer, mobile
Over telephone

Question 34

Can people use savings accounts to store money for future use?

Answer 34

Yes

Question 35

How can people borrow money using current accounts?

Answer 35

Overdrafts - for short term use

Question 36

How are young children likely to use their money?

Answer 36

Spend (make payments)

Save for higher value items

Question 37

How are young adults likely to use their money?

Answer 37

Spend on living expenses

Question 38

How are adults likely to use their money?

Answer 38

Spend on living expenses
Spend on ‘fun items’
Borrow to buy a home
Save for future

Question 39

How are parents likely to use their money?

Answer 39

Borrow money to pay for eg family size car
Spend on living expenses
Spend on gifts for children
Difficult to save

Question 40

How are middle aged people likely to spend their money?

Answer 40

Saving for old age after having paid off debts

Question 41

How are retired people likely to use their money?

Answer 41

Spend

Lower income than when they were working