Cambridge IGCSE Economics 0455
Syllabus points
- Explain the functions and characteristics of money.
- Explain the role of central banks and commercial banks.
Money and its functions
Money is anything widely accepted as payment for goods and services. Before money, people used barter (swapping goods), which needed a "double coincidence of wants". Money solves this. It has four functions:
- Medium of exchange — accepted in payment, so trade is easy.
- Store of value — it holds its value over time, so people can save.
- Unit of account — a common measure of value for pricing goods.
- Standard of deferred payment — allows borrowing and lending (paying later).
Characteristics of good money
To work well, money should be acceptable, durable, portable, divisible, scarce (limited in supply) and hard to forge.
Key definitions
| Term | Definition |
|---|---|
| Money | Anything widely accepted as a means of payment. |
| Central bank | The bank responsible for issuing currency and running monetary policy. |
| Commercial bank | A bank that accepts deposits and makes loans to the public and firms. |
Banks
- Commercial banks accept savings (deposits), lend money to households and firms, and provide payment services. They make profit from the difference between the interest they charge borrowers and pay savers.
- The central bank (e.g. the Bank of England) issues notes and coins, sets interest rates, controls monetary policy, and acts as the "lender of last resort" to keep the banking system stable.
Commercial banks serve the public; the central bank oversees the whole system and controls monetary policy.
Worked example
A family deposits savings in a commercial bank, which pays them a little interest. The bank lends most of that money to a firm wanting to expand, charging a higher interest rate. The bank profits from the gap, savers earn interest, and the firm gets funds to invest — money moving resources to where they are productive.
Common exam mistakes
- Listing only one or two functions of money — learn all four.
- Confusing the central bank (oversees the system) with commercial banks (serve customers).
Exam technique
Learn the four functions and the characteristics of money as short-answer material, and link the central bank to monetary policy (Unit 4).
Quick revision
- Money functions: medium of exchange, store of value, unit of account, deferred payment.
- Commercial banks: deposits and loans. Central bank: currency, interest rates, stability.