Worksheet on Money (Advanced)
MONEY - What is it? What use is it? How do we control it? How do we get it?
Actually this worksheet doesn't answer the last of those four questions, but perhaps it got you to start reading it!
STEP 1 - What is money?
You may think you know the answer to this straight away, and you certainly don't need Biz/ed to help you recognise money, but why is it that we think of this as money? The function of money has been performed by many other things over the years, and our current form of money has evolved as the best way of trading. Why is this?
Look in your textbook or course notes to find out the functions of money and fill them in the table below:-
| FUNCTIONS OF MONEY |
|---|
| 1...... |
| 2...... |
| 3...... |
| 4...... |
To fulfil these functions, money has to have certain characteristics. What are these?
| CHARACTERISTICS OF MONEY |
|---|
| 1...... |
| 2...... |
| 3...... |
| 4...... |
| 5...... |
| 6...... |
| 7...... |
STEP 2 - What can we use as money?
As mentioned, many items have served as money in the past. Tobacco, shells and playing cards have all been used, but have now faded into history (as money, that is!). Why is that? The answer may lie with how well they fulfil the characteristics of money. In the table below, put how well you think each different form of money fulfils that characteristic. Does each one fulfil that characteristic well, indifferently or badly?
| Characteristic |
Tobacco
(Good, indifferent or bad?) |
Shells
(Good, indifferent or bad?) |
Playing cards
(Good, indifferent or bad?) |
Precious stones (diamonds etc.)
(Good, indifferent or bad?) |
| 1.... | ||||
| 2.... | ||||
| 3.... | ||||
| 4.... | ||||
| 5.... | ||||
| 6.... | ||||
| 7.... |
From this we can perhaps see why our money has evolved the way it has. It measures up well against most of these characteristics, though perhaps not all of them.
What problems might there be with our current notes and coins as a form of money?
STEP 3 - What alternatives might there be?
Clearly while notes and coins have their place as a form of money, we need other ways to store our money. To find out some other ways that the Nationwide Building Society (http://www.nationwide.co.uk) offer you to store your money, go to their site and do the following:
- Follow the link to products and services
- From there follow the link to their savings products
- Then look at the section that compares their different accounts
- Use the information there to fill in the table below:-
| Product / account name | Minimum balance to open | Minimum time period | Current rate of interest |
|---|---|---|---|
The rate of interest on money can be thought of in two different ways. For savers it can be thought of as the opportunity cost of holding money. Holding money as cash or in a current account means that you are not getting interest from the money. For borrowers the rate of interest can be thought of as the price of money.
What happens to the rate of interest in Nationwide accounts as the minimum time period increases?
Why is this the case?
STEP 4 - The price of money
As mentioned above the rate of interest can be thought of as the price of money. On the diagram below draw a supply and demand curve to show how interest rates are determined:-
What will happen to the rate of interest if supply or demand changes? For each of the situations below, try to work out the following and fill in the table below with the answers:-
- which curve will shift (supply or demand)
- identify which the new curve will be from the diagram below (i.e. D1 or D2, S1 or S2)
- say whether the rate of interest will go up or down
| Event | Which curve shifts? | New curve? | Rate of interest - up or down? |
|---|---|---|---|
| Government puts in place tight monetary targets as part of a new tight monetary policy | |||
| Government buys back gilt-edged securities before their due date | |||
| A generous tax-cutting budget leads to a spending boom | |||
| De-regulation of the banking system leads to a lending boom | |||
| The government prints more money to help finance their spending plans |
STEP 5 - Earning money that isn't money!!
Over the years people have always been very ingenious in the ways they have found to trade. Although we now have an almost universally accepted form of money, people today are no exception. One modern example of this is the LETS (Local Exchange Trading) system. The LETS groups are locally organised groups who instead of using money, trade in their own LETS currency. To find out some more go to the LETS site (http://www.gmlets.u-net.com/) or to an information page about LETS systems (http://www.gmlets.u-net.com/explore/found/index.html) and try to answer the questions below:-
How does the LETS system work?
What are the advantages of the LETS system of trading?
How well does LETS money tie in with the characteristics of money that we looked at above?
| Characteristic |
LETS system
(Good, indifferent or bad?) |
| 1...... | |
| 2...... | |
| 3...... | |
| 4...... | |
| 5...... | |
| 6...... | |
| 7...... |
Where is your nearest LETS group?
Are LETS systems exempt from taxation? Can it be used as a method for avoiding tax?
What advantages might LETS systems have for businesses?