The four functions of money
Money has four functions (what it does): a medium of exchange (accepted for goods and services, removing the need for barter), a measure of value / unit of account (compares the value of goods in one common unit), a store of value (can be saved and spent later because it holds its value), and a means of deferred payment (buy now, pay later, e.g. on credit). Each is a function, not a characteristic.
The characteristics of money
To act as money, something should be acceptable (everyone will take it), durable (lasts), portable (easy to carry), divisible (splits into small units), scarce (so it holds value), and recognisable / hard to forge. Do not confuse a characteristic (portable) with a function (medium of exchange) — examiners penalise the swap.
Commercial vs central banks
A commercial bank is a profit-making firm serving households and businesses: it takes deposits, makes loans and overdrafts, and transfers payments. A central bank is the government's bank: it issues notes and coins, is banker to the government and the commercial banks, holds the foreign-currency reserves, and runs monetary policy (mainly by setting the rate of interest). Keep the two roles separate.
Drawn from real examiner reports.
Function, not description or characteristic
Asked to state functions of money, do not write "money pays for goods" (a vague description) or list a characteristic like "it is portable". The four correct terms are precise: medium of exchange, measure of value (unit of account), store of value, and means of deferred payment. Use the exact named function.
June 2023 Paper 21 (Structured) Q2(a): the report noted most candidates knew at least one function, usually medium of exchange or measure of value, but there were errors in the wording of the term — some could only give a description, and a few gave characteristics rather than functions.
Monetary vs fiscal policy
A change in the rate of interest (and money supply) is monetary policy, run by the central bank. Changes in government spending and taxation are fiscal policy, run by the treasury. Read whether a question is about interest rates (monetary) or taxes and spending (fiscal) — mixing them loses marks.
June 2023 Paper 11 (Multiple Choice) Q18: only 47% answered correctly. The report stated candidates had to distinguish monetary-policy measures from fiscal-policy measures, and those who did not may have failed to notice the question referred only to monetary policy.
Interest-rate effect: wrong direction
A fall in the rate of interest lowers the cost of borrowing, so households spend more and firms invest more — total demand and gross domestic product (GDP) tend to rise; a rise does the opposite. Some candidates answer about a rise when the question asks about a cut, or describe the effect on banks' own profits rather than on borrowing and spending.
November 2022 Paper 22 (Structured) Q5(d): a small proportion of candidates wrote about an increase rather than a decrease in the rate of interest. In November 2022 Paper 21 (Structured) Q3(c) some candidates strayed in a confused way into the effect of interest-rate cuts on banks and the government rather than on borrowing, consumption and total demand.
Central bank is not a normal bank
Do not treat the central bank as an ordinary bank. It is the government's bank and does not serve the public: it issues notes and coins, is banker to the government and the commercial banks, is lender of last resort, and runs monetary policy. Only commercial banks take deposits from and lend to households and firms.
Explain via market power, do not repeat
When a big bank charges high fees, do not just restate that it charges more. Explain the mechanism: with fewer competitors the bank has market power, so it can raise fees and pay savers less without losing many customers. Restating the question earns nothing — the marks are for the economic reason.
November 2022 Paper 22 (Structured) Q1(d): on a large commercial bank charging high prices, candidates repeated the question rather than explaining the outcome via the bank's market power.
Structure the 8-mark discuss (d)
Part (d) rewards analysis (AO2) and evaluation (AO3), not lists. Develop each point as a chain, argue both sides, then reach a justified judgement (e.g. it depends on how responsive borrowing is, or how close the economy is to full capacity). Do not rush this part.
Trace the interest-rate chain
On monetary policy, trace the full chain: a rate cut → borrowing is cheaper → households consume more and firms invest more → total demand rises, supporting output. A rate rise reverses it. Keep the effect on the wider economy, not on banks' own profits.
Match depth to the command word
Paper 2 climbs a ladder: (a) define (2) — a precise sentence, (b) explain (4) — reasons developed, (c) analyse (6) — a cause-and-effect chain, (d) discuss (8) — both sides plus a judgement. Match effort to the command word; do not over-write or under-develop.
Before money, people used barter — swapping one good directly for another. Barter needs a double coincidence of wants: each person must want exactly what the other is offering. Money solves this problem because it is generally accepted in exchange for any good or service.
Learn these as precise functions — what money does:
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