3.1

Money and banking

Cambridge IGCSE Economics (0455)  · Unit 3: Microeconomic decision makers  · 9 flashcards

Money and banking is topic 3.1 in the Cambridge IGCSE Economics (0455) syllabus , positioned in Unit 3 — Microeconomic decision makers , alongside Households, Workers and Trade unions.  In one line: Money is anything generally accepted as a medium of exchange. Its functions are: a medium of exchange (facilitating transactions), a store of value (holding purchasing power over time), and a unit of account (providing a common measure of value).

This topic is examined in Paper 1 (multiple-choice) and Paper 2 (structured questions, including data-response items).

The deck below contains 9 flashcards — 3 definitions, 5 key concepts and 1 application card — covering the precise wording mark schemes reward.  Use the 3 definition cards to lock down command-word answers (define, state), then move on to the concept and application cards to handle explain, describe and compare questions.

Key definition

'money' and list its three key functions

Money is anything generally accepted as a medium of exchange. Its functions are: a medium of exchange (facilitating transactions), a store of value (holding purchasing power over time), and a unit of account (providing a common measure of value).

Questions this Money and banking deck will help you answer

Definition Flip

Define 'money' and list its three key functions.

Answer Flip

Money is anything generally accepted as a medium of exchange. Its functions are: a medium of exchange (facilitating transactions), a store of value (holding purchasing power over time), and a unit of account (providing a common measure of value).

Key Concept Flip

Explain why 'medium of exchange' is a crucial function of money.

Answer Flip

As a medium of exchange, money eliminates the need for barter, which requires a 'double coincidence of wants.' Money simplifies transactions, promoting specialization and trade.

Key Concept Flip

Why is it important for money to be a good 'store of value'?

Answer Flip

If money poorly retains its value (

Example: due to high inflation), people will be less willing to accept it in exchange for goods and services. This undermines its function as a medium of exchange.
Definition Flip

Describe the role of a 'commercial bank'.

Answer Flip

Commercial banks accept deposits, provide loans to individuals and businesses, and facilitate payments. They aim to make a profit by charging higher interest rates on loans than they pay on deposits.

Definition Flip

Outline three key functions of a 'central bank'.

Answer Flip

Central banks issue currency, act as a banker to commercial banks and the government, and implement monetary policy (

Example: setting interest rates) to control inflation and promote economic stability.
Key Concept Flip

Explain how an increase in the 'interest rate' might affect savings and borrowing.

Answer Flip

Higher interest rates incentivize saving, as returns on savings increase. Conversely, higher interest rates discourage borrowing, as the cost of borrowing rises.

Key Concept Flip

What is the relationship between saving and investment in the economy?

Answer Flip

Saving provides the funds for investment. When individuals and firms save, these savings can be channeled through banks and financial markets to fund investment in new capital goods, leading to economic growth.

Key Concept Flip

Explain how banks create money.

Answer Flip

Banks create money through lending. When a bank provides a loan, it credits the borrower's account, creating new money in the economy. This process is limited by the reserve requirements set by the central bank.

Key Concept Flip

How can a central bank use interest rates to control inflation?

Answer Flip

By increasing interest rates, a central bank makes borrowing more expensive, reducing consumer spending and investment. This lowers aggregate demand, which can help to curb inflationary pressures.

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2.10 Mixed economic system 3.2 Households

Key Questions: Money and banking

Define 'money' and list its three key functions.

Money is anything generally accepted as a medium of exchange. Its functions are: a medium of exchange (facilitating transactions), a store of value (holding purchasing power over time), and a unit of account (providing a common measure of value).

Describe the role of a 'commercial bank'.

Commercial banks accept deposits, provide loans to individuals and businesses, and facilitate payments. They aim to make a profit by charging higher interest rates on loans than they pay on deposits.

Outline three key functions of a 'central bank'.

Central banks issue currency, act as a banker to commercial banks and the government, and implement monetary policy (

Example: setting interest rates) to control inflation and promote economic stability.

More topics in Unit 3 — Microeconomic decision makers

Money and banking sits alongside these Economics decks in the same syllabus unit. Each uses the same spaced-repetition system, so progress in one informs the next.

3.2 Households

9 flashcards
3.3 Workers

9 flashcards
3.4 Trade unions

9 flashcards
3.5 Firms

10 flashcards
3.6 Firms and production

9 flashcards
3.7 Firms' costs, revenue and objectives

10 flashcards
3.8 Market structure

9 flashcards

Cambridge syllabus keywords to use in your answers

These are the official Cambridge 0455 terms tagged to this section. Mark schemes credit responses that use the exact term — weave them into your answers verbatim rather than paraphrasing.

money function of money medium of exchange store of value unit of account bank commercial bank central bank interest rate savings borrowing

Key terms covered in this Money and banking deck

Every term below is defined in the flashcards above. Use the list as a quick recall test before your exam — if you can't define one of these in your own words, flip back to that card.

'money' and list its three key functions
Describe the role of a 'commercial bank'
Outline three key functions of a 'central bank'

How to study this Money and banking deck

Start in Study Mode, attempt each card before flipping, then rate Hard, Okay or Easy. Cards you rate Hard come back within a day; cards you rate Easy push out to weeks. Your progress is saved in your browser, so come back daily for 5–10 minute reviews until every card reads Mastered.