Money & Banking
Microeconomic Decision Makers
The syllabus expects you to know the four functions of money.
| Function | What it means |
|---|---|
| Medium of exchange | Money is accepted in return for goods and services, so people no longer need a double coincidence of wants. It is used to buy, sell and trade. |
| Store of value | Money keeps its value over time, so people can save now and spend later (this only holds well when inflation is low). |
| Unit of account (measure of value) | Money provides a common measure in which the price of every good can be expressed and compared. |
| Standard of deferred payment | Money lets people buy now and pay later, so debts, loans and contracts can be set in money terms. |
Common exam question
Identifying and explaining the functions of money
Question: Identify two functions of money, or explain two of them (2–4 marks).
Asked in 3 of the 11 structured papers. For Identify, any two of the four score: unit of account, store of value, medium of exchange and standard of deferred payment. A description without the term ("used to buy and sell things") still scores; a characteristic such as durability scores nothing. For Explain, name each function (1) and say what it does (1): compare what products are worth, save, buy and sell, or borrow and lend.
The same idea is set in 5 of the 13 multiple-choice papers, as a situation to match to its function. A measure of value is the unit of account (comparing what goods are worth); wrong options describe buying, saving or borrowing. Saving for old age uses money as a store of value, which inflation weakens: savers lose, and in rapid inflation cash holds its value worse than gold, property or shares.