Functions of money
- Medium of exchange
- Store of value
- Unit of account
- Method of differed payment
A Medium of Exchange
- Without money, it’s necessary for buyers & sellers to barter
- Bartering is problematic as it requires two people to want each other’s goods
- Money easily facilitates the exchange of goods as no double co-incidence of wants is necessary
Unit of account
- Money provides a means of ascribing value to different goods and services
- Knowing the price of a good in terms of money allows both consumers and producers to make decisions in their best interests
- Without this measure it is difficult for buyers & sellers to arrange an agreeable exchange
Store of value
-Money holds its value over time
- This means that money can be saved
- It remains valuable in exchange over long periods of time
A Method of Deferred Payment
- Money is an acceptable way to arrange terms of credit (loans) & to settle any future debts
- Allows producers & consumers to acquire goods in the present & pay for them in the future
Characteristics of money
- Acceptability
- Divisibility
- Portability
- Scarcity
- Uniformity
- Durability
Divisibility
To be a valued medium of exchange, currency must be divisible
Acceptability
Currency must be valued & widely accepted by society as a valid way to pay for goods/ services
Durability
Currency must be robust, not easily defaced/destroyed & last for a long period of time
Scarcity
Supply of the currency should be such that is remains desirable & retains its value in the market
Uniformity
In order to be a valid measure of value each denomination must be exactly the same e.g. every $50 note must be exactly the same
Portability
Good currency is easy to carry/conceal
Functions of Central Banks
Central Banks play a vital role in maintaining stability in the financial system.
Policy tools at their disposal help to meet Government economic objectives & create economic growth
Central Banks play four important roles in the economy
- Implementation of monetary policy
- Banker to govt.
- Regulation of banking industry
- Banker to Banks
Banker to govt.
The Govt. sets the annual budget but it is the Central Bank that manages the tax receipts & payments
Banker to the banks – lender of last resort
- Commercial banks are able to borrow from the Central Bank when they run into short-term liquidity issues.
- Without this help, they might go bankrupt leading to instability in the financial system - & a potential loss of savings for many households.
Regulation of the banking industry
High level of asymmetric information in financial markets requires that commercial banks are regulated in order to protect consumers
Functions of Commercial Banks
- They facilitate saving
- They lend to businesses & individuals
- They facilitate the exchange of goods & services
- They provide forward markets in currencies & commodities
- They provide a market for equities
Facilitate for businesses
storing money for future use is essential for households & firms. It also provides a pool of money that financial institutions can lend i.e. one person’s savings is another person’s borrowing
They lend to businesses & individuals
access to credit is a key requirement for economic growth & development. Being able to borrow money speeds up consumption by households & investment by firms. It also allows households or firms to purchase assets & pay them off over an extended period of time e.g. mortgages on home purchases
Facilitate the exchange of goods & services
Each purchase of goods/services requires the movement of money between at least two parties.
Commercial Banks provide multiple ways for this exchange to happen including phone apps (e.g. Google Pay), debit cards, credit cards & bank transfers
provide forward markets in currencies & commodities
Forward markets are also called futures markets.
They provide some price stability in commodity markets & enable investors to make a profit by speculating on future prices
provide a market for equities
Equities are shares in public companies that are listed on stock exchanges around the world. Commercial Banks facilitate both long term investment & speculation by providing platforms which connect buyers & sellers
