The Role Of Money And Financial Markets
Overview
A baker who wants a pair of shoes has to find a shoemaker who happens to want bread, today, in the quantity the baker can supply. Miss on any one of those and no trade happens at all, no matter how much each of them wants what the other has. Money exists because that problem is unbearable, and once you see the problem clearly, every one of money's properties turns out to be a solution to part of it.
This lesson sets out the four functions the specification asks you to know, and shows why money is far more than the notes and coins in circulation. It then turns to the institutions that move money between the people who have it and the people who can use it: commercial banks, which fund investment and serve savers and borrowers, the central bank, which sets interest rates and keeps the whole system standing up, and the insurers, pension funds and stock exchanges that sit alongside them. This is a short topic on the specification and a reliable source of marks on Paper 2.
Objectives
- Functions of money
- Definition of money
- The role and importance of the financial sector for the economy
- The financial sector
- The role of central banks
- The role of other institutions in the financial sector
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Lesson Note
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Lesson Evaluation
Congratulations on completing the lesson on The Role Of Money And Financial Markets. Now that youve explored the key concepts and ideas, its time to put your knowledge to the test. This section offers a variety of practice questions designed to reinforce your understanding and help you gauge your grasp of the material.
You will encounter a mix of question types, including multiple-choice questions, short answer questions, and essay questions. Each question is thoughtfully crafted to assess different aspects of your knowledge and critical thinking skills.
Use this evaluation section as an opportunity to reinforce your understanding of the topic and to identify any areas where you may need additional study. Don't be discouraged by any challenges you encounter; instead, view them as opportunities for growth and improvement.
- Which of the following is a role of commercial banks in an economy? A. Encouraging investment by lending to businesses B. Issuing the country's banknotes C. Setting the interest rate for the whole economy D. Supervising the stability of the financial system Answer: A
- Which function of money allows debts to be recorded now and settled at a later date? A. A means of deferred payment B. A medium of exchange C. A store of value D. A unit of account Answer: A
- Which of the following is NOT normally counted as money? A. Balances in a current account B. Banknotes and coins C. A house owned by a household D. A mobile money wallet balance Answer: C
- Which of the following is a role of a central bank rather than a commercial bank? A. Acting as lender of last resort to the banking system B. Offering current accounts to households C. Paying interest to individual savers D. Providing mortgages to house buyers Answer: A
- A bank pays savers 3% and charges borrowers 8%. What is its interest margin? A. 3 percentage points B. 5 percentage points C. 8 percentage points D. 11 percentage points Answer: B
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Recommended Books
Further learning from open sources
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Textbook section
Defining Money by Its Functions
Explain the various functions of money
"Principles of Economics 2e: Defining Money by Its Functions" by OpenStax, OpenStax, Rice University, licensed under CC BY 4.0 (https://creativecommons.org/licenses/by/4.0/). Source: https://openstax.org/books/principles-economics-2e/pages/27-1-defining-money-by-its-functions. Access for free at https://openstax.org/books/principles-economics-2e/pages/1-introduction
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Textbook section
The Role of Banks
Explain how banks act as intermediaries between savers and borrowers
"Principles of Economics 2e: The Role of Banks" by OpenStax, OpenStax, Rice University, licensed under CC BY 4.0 (https://creativecommons.org/licenses/by/4.0/). Source: https://openstax.org/books/principles-economics-2e/pages/27-3-the-role-of-banks. Access for free at https://openstax.org/books/principles-economics-2e/pages/1-introduction
Published by other organisations under open licences, credited as they ask. Links open their websites.
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