Topic 5.1 - Money & Interest Rates (Incomplete)

Question 1

What are the 4 functions of money

Answer 1

• As a medium of exchange
• As a measure of value
• As a store of value
• As a method of deferred payment

Question 2

Explain how money works as a medium of exchange

Answer 2

Without money, there is a barter economy. This is where people trade goods for other goods.
Trade can only occur when both parties want each other’s good, which is very rare
Goods exchanged were not of the same value meaning one party would benefit and one party would suffer

Money eliminates this problem by acting as a middleman
One good is traded in for money, which can then be used to by any kind of good.

Question 3

Explain how Money works as a Measure of Value (Unit of Account)

Answer 3

Money puts a price on goods and labour.
For example a diamond is more valuable than a chair due to its price

Question 4

Explain how Money works as a Store of Value

Answer 4

Money can be kept for a long time without expiring.
However, it can lose or increase its value over time due to supply and demand and exchange rates.

Question 5

Explain how Money works as a Method of Deferred Payment

Answer 5

Money allows debt to created.
People consume goods in the present and pay for them later.
Can only happen because money will keep its value in the long run.

Question 6

What are the 6 Characteristics of Money

Answer 6

• Durability
• Divisibility
• Portability
• Uniformity
• Limited Supply
• Acceptability

Question 7

Explain what is meant by Money being Durable

Answer 7

So that physical notes and coins are not easily damaged and can be kept for long amounts of time without being damaged.

Question 8

Explain what is meant by Money being Divisible

Answer 8

So that exact values can be traded for goods.

For example you cannot trade a quarter of a shoe for a chair so that they match each other values since that would require damaging the good.

Question 9

Explain what is meant by Money being Portable

Answer 9

Easy to carry around.
Hard to carry around gold bars to trade with

Question 10

Explain what is meant by Money being Uniform

Answer 10

Each note of money (£10, £20) holds the same value as all other notes.
And money holds the same value whether it is in person or digital
Ensures reliability

Question 11

Explain what is meant by Money having Limited Supply

Answer 11

Money is not printed very often or very fast ensuring that it is scarce enough to have and hold a value.

Question 12

Explain what is meant by Money being Acceptable

Answer 12

All firms and consumers have enough confidence in the stability and reliability of money to accept it as a means of trade.

Question 13

What is meant by the term ‘liquidity’

Answer 13

How easy it is to convert an asset into a form that can be used for transactions

Coins & Notes - Very Liquid
Bank Accounts - Slightly less liquid
Shares & Bonds - Much less liquid