Money and the Banking System
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Money and the Banking System

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Questions and Answers

What function of money allows banks to create loans supporting growth for people and businesses?

  • Facilitates Economic Activity
  • Transfer of Value
  • Store of Value
  • Basis of Credit Creation (correct)
  • Which of the following describes money's function as a Store of Value?

  • Money helps in measuring and comparing values.
  • Money can be exchanged for goods immediately.
  • Money facilitates the transfer of payments between parties.
  • Money allows individuals to save and preserve value over time. (correct)
  • How does money facilitate the Creation and Redistribution of National Income?

  • By influencing the inflation rates in the economy.
  • By reducing the need for direct bartering.
  • By enabling trade and improving resource allocation. (correct)
  • By generating employment opportunities in banks.
  • Which characteristic of money allows it to be used for making future payments, such as with loans or credit?

    <p>Standard of Deferred Payments</p> Signup and view all the answers

    What function of money helps track wealth and inform financial decision-making?

    <p>Unit of Account</p> Signup and view all the answers

    Which form of early money was based on items with intrinsic value?

    <p>Commodity Money</p> Signup and view all the answers

    What characteristic of money ensures that it can be divided into smaller units for various transaction sizes?

    <p>Divisibility</p> Signup and view all the answers

    Which type of money is not backed by commodities, but derives its value from trust?

    <p>Fiat Money</p> Signup and view all the answers

    What is one of the primary functions of money as a medium of exchange?

    <p>Simplifies transactions without direct trade of goods</p> Signup and view all the answers

    Which type of money emerged to avoid the burden of carrying heavy coins?

    <p>Paper Money</p> Signup and view all the answers

    Study Notes

    Money and the Banking System

    • Money originated from barter systems evolving into commodity money (like shells and grains), metal coins, paper money, banknotes/banking, and finally, fiat money.
    • Fiat money isn't backed by commodities, its value is based on trust.
    • Digital and cryptocurrencies are recent forms of money.

    Overview

    • Origin of money, characteristics of money, function of money, types of money, banking and money supply, and importance of introducing money are covered.

    Origin of Money

    • Early trade was based on direct exchange (barter) but limited by mutual wants.
    • Commodity money used items with value (shells, grains).
    • Metal coins (gold, silver) became standardized by governments.
    • Paper money originated in China to avoid carrying heavy coins.
    • Banks issued receipts for stored gold leading to paper currency.
    • Modern money isn't backed by commodities; its value is based on trust.
    • Current forms like digital currency and cryptocurrencies.

    Characteristics of Money

    • Durability: Money should last and withstand repeated use.
    • Portability: Easy to carry and transfer.
    • Divisibility: Divided into smaller units for transactions.
    • Uniformity: Each unit has the same value.
    • Limited Supply: Availability in a limited amount.
    • Acceptability: Widely accepted as a medium of exchange.

    Functions of Money

    • Medium of Exchange: Simplifies transactions, replacing barter.
    • Unit of Account: Standard measurement for pricing and comparing value.
    • Store of Value: Retains value over time, useful for savings.
    • Standard of Deferred Payment: Enables borrowing and repayment.

    Primary Functions

    • Medium of Exchange: Enables buying and selling without direct exchange.
    • Measure of Value: Provides a clear value to goods and services

    Contingent Functions

    • Basis of Credit Creation: Money allows banks to create loans.
    • Employing Factor Inputs: Decision-making on resources (labour, materials).
    • Creation & Redistribution of National Income: Spread income throughout the economy.
    • Liquidity: Money quickly accessible when needed.

    Secondary Functions

    • Store of Value: Can be saved and retains value.
    • Transfer of Value: Easily sent/received between people.
    • Standard of Deferred Payment: For future payments (loans, credit).

    Types of Money

    • Commodity money, fiat money, fiduciary money, and Commercial bank money.

    Banking and the Money Supply

    • Banks increase reserves when deposited.
    • Banks lend excess reserves, increasing the money supply.

    Importance of Money

    • Facilitates economic activity (buying, selling, & trading).
    • Unit of Account: Measurement, tracking wealth, financial decisions.
    • Store of Value: Saving for future needs, stability.
    • Supports International Trade: Collaboration and interactions.
    • Foundation for Banking and Finance: Underpins lending, investment.
    • Enables Economic Policy: Allows governments/central banks to promote stability and growth

    Technological Integration

    • Technology reshapes the Financial sector, offering opportunities and challenges for Fintech.
    • Fintech aims to create a more inclusive and efficient financial ecosystem.

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    Description

    Explore the evolution of money from bartering to fiat and digital currencies in this quiz. Understand the characteristics, functions, and types of money as well as the role of banks in the money supply. Test your knowledge on how trust impacts modern financial systems.

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