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Economics IGCSEPDF 52
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These are
high-street banks that individuals and firms
use daily. Their main functions are:
● Accepting Deposits: Providing safe
accounts (current, savings) for
people and firms to store their
money.
● Making Loans: Lending money to
individuals (e.g., mortgages,
personal loans) and firms (e.g.,
business loans) to finance
expenditure and investment. This is
their main source of profit, earned
through interest rate differentials.
Providing Financial Services:
Offering services like credit/debit
●
● Divisibility: It must be easily divided
into smaller denominations.
● Scarcity: Its supply must be limited
to ensure it holds its value.
● Uniformity: All units of the same
denomination must be identical.
The four functions of money are crucial:
1. Medium of Exchange: Facilitates
the buying and selling of goods and
services.
2. Measure of Value (Unit of
Account): Provides a common
measure of the value of goods and
services, allowing for comparison.
3. Store of Value: It can be held over
time and used for future purchases.
Its value should remain relatively
stable.
4. Standard for Deferred Payment:
Allows for contracts for future
payments (i.e., loans and debts) to
be made.
The stock exchange is a vital component of
the financial system. Its main roles are:
● Raising Capital for Firms: It allows
public limited companies (PLCs) to
raise finance by issuing new shares
(primary market).
● Facilitating Market for
Second-hand Shares: It allows
cards, foreign currency exchange,
and financial advice.
2. Central Banks: The central bank is the
apex financial institution in a country. Its key
functions include:
● Sole Issuer of Banknotes and
Coins: It is the only body with the
legal authority to print and mint the
national currency.
● Banker to the Government: It
manages the government's finances,
processes payments, and issues
public debt (government bonds).
● Banker to Commercial Banks:
Commercial banks hold accounts at
the central bank, which they use to
settle debts with each other.
Lender of Last Resort: If a
commercial bank faces a liquidity
crisis, the central bank can provide
an emergency loan to prevent it from
collapsing and protect the financial
system.
●
● Managing the National Debt: It
handles the issuance and repayment
of government debt.
● Implementing Monetary Policy: It
uses tools like interest rates and
quantitative easing to manage the
money supply, control inflation, and
influence economic activity.
The Role of Banks
1. Commercial Banks:
The Stock Exchange