Money and banking
The functions of money
- Barter (swapping goods) is hard — you must find a double match. Money solves this.
- Money does four jobs:
- medium of exchange (swap money for goods),
- store of value (hold now, spend later),
- unit of account (measures value — the price),
- means of deferred payment (buy now, pay later).
- Good money is durable, portable, divisible, limited and accepted.
Practice
Using money to buy goods, instead of swapping goods directly, is its function as a:
A medium of exchange replaces barter; the other functions store value, measure prices and defer payment.
Practice
Good money should be: (Choose all that apply.)
Money must be durable, portable, divisible, limited and hard to copy.
Banks
- the central bank is the government's bank — issues notes, oversees the system, sets interest rates.
- commercial banks are the ordinary banks people and firms use — keep savings, lend, and move payments.
Practice
Which bank sets a country's interest rates?
The central bank issues notes, oversees the system and sets interest rates.
You've got it
Key idea
- money's four functions: medium of exchange, store of value, unit of account, deferred payment
- good money is durable, portable, divisible, limited and accepted
- central bank (sets interest rates) vs commercial banks (save and lend)