Unit 3.1 Money and Finance

Question 1

Specialization

Answer 1

When a nation or individual concentrates its productive efforts on producing a limited variety of goods

Question 2

Barter

Answer 2

• Exchanging one good or service directly for another.
  Disadvantages:
• Fixing a rate of exchange between every possible combination of goods
• Finding someone to swap with (who can provide what you are looking for and is ready to take what you are willing to provide)
• Perishable goods cannot be saved (lose their value if not exchanged in time.

Question 3

Money

Answer 3

• An economic unit that functions as a generally recognized medium of exchange for transactional purposes in an economy

Question 4

Functions of Money

Answer 4

• Medium of exchange (overcomes the problem of needing a double coincidence)
• Measure of value (all items’ value can be expressed in terms of one unit)
• Store of value (Non-perishable, and retains its value over long periods of time and any contexts
• Makes deferred or long-term payments easier.

Question 5

Properties of good money

Answer 5

• Acceptability (widely accepted by all tradespeople)
• Token (the actual material is worth much less than the face value)
• Durability (Can last for a long time, retains and stores its value)
• Portability (Easy to use - lightweight and small)
• Divisibility (Can be split into a lot of smaller denominations easily to represent more precise values)
• Scarcity (Limited in supply to have value - can be earned)

Question 6

Stage 1 (First) of Money

Answer 6

• Some goods that had more characteristics of good money than others were used more commonly in exchange
• Shells, Knives, Shoes

Question 7

Stage 2 of Money

Answer 7

• Precious metals were used commonly (Gold Silver Copper Bronze etc.)
• Weight of the metal corresponded to value

Question 8

Stage 3 of Money

Answer 8

• Problem of portability of precious metals, lead to smaller pieces (coins, small bits of metals)
• Often stamped with photo of gods, images or monarchs

Question 9

Stage 4 of Money

Answer 9

• People deposited their precious metals with goldsmiths who provided them with paper receipts.
• People started exchanging the paper receipts rather than withdrawing the gold and then putting it back.

Question 10

Stage 5 (Final) of Money

Answer 10

• Banks and other institutions started issuing a lot of recepits and ‘banknotes’
• Government started central banks to issue official currency.

Question 11

Money Supply

Answer 11

• Constitutes total notes and coins circulating in an economy, deposits and banks (and other financial institutions)