Money and Banking (Copy)
3.1 Money and Banking
3.1.1 Money
Forms of Money
| Form | Examples |
|---|---|
| Commodity money | Gold, silver, salt |
| Notes and coins | Paper currency, coins |
| Bank deposits | Savings/current accounts |
| Electronic money | Debit cards, mobile banking, e-wallets |
Functions of Money
| Function | Explanation | Example |
|---|---|---|
| Medium of exchange | Used to buy/sell goods | Pay with Rs.100 note |
| Unit of account | Common measure of value | Car costs Rs. 2,000,000 |
| Store of value | Holds value over time | Saving Rs.500 for future |
| Standard of deferred payment | Allows borrowing/lending | Loan repayment in installments |
Characteristics of Money
- Acceptable (widely trusted and used)
- Portable (easy to carry)
- Durable (long-lasting)
- Divisible (can be split into units, e.g. Rs.10, Rs.20)
- Scarce (limited supply, otherwise inflation)
- Stable value (not rapidly changing in worth)
Written and Compiled By Sir Hunain Zia, World Record Holder With 154 Total A Grades, 7 Distinctions and 11 World Records For Educate A Change O Level And IGCSE Economics Full Scale Course
3.1.2 Banking
Central Bank
- Definition: The main government bank that manages a country’s money and financial system.
- Roles for Government:
- Issues currency.
- Controls monetary policy (interest rates, inflation).
- Regulates commercial banks.
- Lender of last resort in crises.
- Roles for Producers and Consumers:
- Keeps inflation stable → stable business environment.
- Provides financial stability.
- Examples: State Bank of Pakistan, Bank of England.
Commercial Banks
- Definition: Profit-making banks providing financial services to consumers and firms.
- Roles for Consumers:
- Accept deposits (savings, current accounts).
- Provide loans, mortgages, overdrafts.
- Offer payment services (ATM, debit/credit cards, online banking).
- Roles for Producers (Firms):
- Provide business loans and overdrafts.
- Facilitate trade (letters of credit, foreign exchange).
- Safe deposit of profits and transactions.
- Roles for Government:
- Help manage government debt by selling bonds.
- Provide banking services for state institutions.
Written and Compiled By Sir Hunain Zia, World Record Holder With 154 Total A Grades, 7 Distinctions and 11 World Records For Educate A Change O Level And IGCSE Economics Full Scale Course
Comparison Table
| Aspect | Central Bank | Commercial Bank |
|---|---|---|
| Ownership | Govt-owned | Privately owned (usually) |
| Main Aim | Economic stability | Profit-making |
| Issues currency | Yes | No |
| Provides loans | To govt + commercial banks | To individuals + firms |
| Role | Controls inflation, monetary policy | Provides everyday financial services |
Quick Examples for Exams
- Central Bank: Raises interest rates to reduce inflation.
- Commercial Bank: Grants a car loan to a consumer or business loan to a factory.
- During financial crises, the Central Bank bails out banks; Commercial Banks continue to lend for business operations.
Memory Hooks
- Money = FFFCCS (Functions: Facilitate exchange, Fix value, Future payments, Carry value, Count value, Stability).
- Central bank = controller, Commercial banks = service providers.
- Central = big picture (inflation, currency), Commercial = daily transactions.
Written and Compiled By Sir Hunain Zia, World Record Holder With 154 Total A Grades, 7 Distinctions and 11 World Records For Educate A Change O Level And IGCSE Economics Full Scale Course