Summary: Econs209

Read the summary and the most important questions on ECONS209

• 1 What is Money?

• What was the initial method of trade before money was developed?

  The first form of trade involved exchanging goods directly through barter. Key points include:
  

  • Relied on "double coincidence of wants"
  • Both parties had to want something from each other.
  • Limited in terms of goods exchanged due to specific requirements.

• What were the main issues associated with barter?

  Barter faced significant difficulties that limited its effectiveness:
  

  1. Some goods cannot be divided (e.g., a cow).
  2. There was no standard measurement for value.
  3. Exchange was often impractical for larger transactions.

• How did commodity money address issues in trade?

  Commodity money emerged to improve trade conditions by offering solutions:
  

  • Items like cattle, salt, shells, and metals possess intrinsic value.
  • Gained widespread acceptance across different communities.
  • Helped standardize the value of goods exchanged.

• What improvements did coins and paper money bring to trade?

  The introduction of coins and paper money enhanced trade by:
  

  • Making exchanges more reliable.
  • Reducing the weight of payments with paper currency.
  • Creating a more flexible payment system, though still based on trust.

• How did banks innovate the process of transactions?

  Banks transformed transactions by allowing financial interactions without cash movement through:
  

  1. Deposits
  2. Cheques
  3. Wire transfers
  4. Credit cards

  - Enabled smoother and more efficient payment methods.

• In what way is digital money changing payments?

  Digital money is revolutionizing the payments landscape in several ways:
  

  • Use of contactless cards and mobile payments.
  • Growth of online banking services.
  • Introduction of cryptocurrencies and CBDCs.
  • Illustrates technology's influence on money usage.

• What are the three core functions of money?

  Money consistently serves three fundamental functions, which are:
  

  1. MEDIUM OF EXCHANGE
  2. STORE OF VALUE
  3. UNIT OF ACCOUNT

  - This holds true regardless of the form, be it shells, gold, or Bitcoin.

• 2 The Financial System & Money Creation

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• What is the role of the financial system in the economy?

  The financial system plays a crucial role by:
  

  1. Connecting savers and borrowers
  2. Facilitating money flow
  3. Enhancing overall economic efficiency
  4. Allowing access to funds for various economic activities

• What is the difference between reserves and deposits?

  Reserves and deposits serve different purposes:
  

  1. Reserves are the actual money banks hold at the central bank
  2. Deposits refer to the funds customers see in their accounts
  3. They are not interchangeable terms

• How does the Official Cash Rate (OCR) influence interest rates?

  The OCR impacts borrowing costs by:
  

  1. Setting rates for borrowing between banks
  2. Influencing general interest rates across the economy
  3. Serving as a monetary policy tool for economic management