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Study notes

Money - Characteristics and Functions (Financial Economics)

  • Levels: GCSE, AS, A Level, IB, BTEC Level 3
  • Exam boards: AQA, Edexcel, OCR, IB, Eduqas, WJEC

According to the Bank of England, in a modern economy, money is a type of IOU, but one that is special because everyone in the economy trusts that it will be accepted by other people in exchange for goods and services.

Functions of money
This short revision video covers the main functions and characteristics of money

Check out our revision video playlist on financial economics

Key Characteristics of Money

  • Durability i.e. it needs to last
  • Portable i.e. easy to carry around, convenient, easy to use
  • Divisible i.e. it can be broken down into smaller denominations
  • Hard to counterfeit - i.e. it can’t easily be faked or copied
  • Must be generally accepted by a population
  • Valuable – generally holds value over time

Key Functions of Money

  1. Medium of exchange: money allows goods and services to be traded without the need for a barter system. Barter systems rely on there being a double coincidence of wants between the two people involved in an exchange
  2. Store of value: this can refer to any asset whose “value” can be used now or used in the future i.e. its value can be retrieved at a later date. This means that people can save now to fund spending at a later date.
  3. Unit of account: this refers to anything that allows the value of something to be expressed in an understandable way, and in a way that allows the value of items to be compared.
  4. Standard of deferred payment: this refers to the expressing of the value of a debt i.e. if people borrow today, then they can pay back their loan in the future in a way that is acceptable to the person who made the loan.

There are three main types of money: currency, bank deposits and central bank reserves

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