The role of money and financial markets
What's covered
Key facts
The role and importance of the financial sector for the economy
High street banks lend to families and businesses, for example to a business that wants to hire more people and expand, which helps the economy grow.
The role of money
Most money in the UK is created by commercial banks when they provide loans, by crediting the borrower's account with new deposits.
The role and importance of the financial sector for the economy
Banks make a profit by charging more interest for lending money than they pay out on people's savings.
The role of money
Without money, trade relies on barter, which only works when each trader has what the other wants (a coincidence of wants), which is often hard to find.
The role and importance of the financial sector for the economy
Banks look after people's money, lend it, and help them pay for things with it; in return they can use the money deposited with them to earn a profit, for example by lending it to other people.
The role of money
As a means (standard) of deferred payment, money allows agreements on future payments, such as loans and contracts.
The role and importance of the financial sector for the economy
The Bank of England works for financial stability, including annual stress tests of the UK's largest banks, building societies and insurers.
The role of money
Money holds its value well only when the currency is stable and inflation is low.
The role and importance of the financial sector for the economy
The Bank of England issues the banknotes people spend in shops and provides wholesale banking services to the UK Government.
The role of money
As a medium of exchange, money acts as an intermediary in buying and selling goods and services.
Practice questions with answers
A taste of the 18 questions in this topic, answers marked. Sign up to practise the full set with spaced repetition.
Which of these is a role of the Bank of England?
- •Deciding the national minimum wage
- ✓Issuing the banknotes used in shops
- •Running current accounts for shoppers
- •Setting the rate of VAT each year
Which function of money lets a shopper compare the prices of a coat and a phone?
- •Deferred payment
- •Medium of exchange
- •Store of value
- ✓Unit of account
How does a commercial bank mainly make a profit?
- ✓Charging more interest on loans than it pays savers
- •Collecting a tax on the interest savers earn
- •Printing new money and then lending it to its customers
- •Setting Bank Rate for the rest of the economy
Agreeing to repay a car loan in monthly instalments over three years relies on which function of money?
- ✓Deferred payment
- •Medium of exchange
- •Store of value
- •Unit of account
Which is part of the Bank of England's work to keep the financial system stable?
- •Deciding government spending on schools
- •Lending directly to households for mortgages
- •Setting the rate of income tax each year
- ✓Stress testing the largest banks each year
According to the Bank of England, how is most new money in the UK created?
- ✓By commercial banks when they make loans
- •By the Bank of England printing notes
- •By the Royal Mint producing new coins
- •By the Treasury when it collects taxes
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