Economics · Year 11 · Personal Finance and the Role of Money · Summer Term

The Functions of Money

Understanding the essential roles money plays in a modern economy.

• National Curriculum Attainment Targets
• GCSE: Economics - Money and Financial Markets
• GCSE: Economics - Role of Money

About This Topic

The financial sector is the 'circulatory system' of the economy, moving money from those who have it (savers) to those who need it (borrowers). Students explore the role of commercial banks, the Central Bank, and the wider financial markets. They learn how banks create credit and the importance of liquidity and stability in the financial system. This topic also touches on the 2008 financial crisis to illustrate what happens when the system fails.

Understanding the financial sector is essential for personal financial literacy and for grasping macroeconomic stability. Students analyze how the sector supports business growth and government spending. This topic comes alive when students can participate in a simulation of the 'banking cycle,' seeing how their deposits are turned into loans for others and the risks involved in this process.

Key Questions

1. Explain the three primary functions of money in an economy.
2. Analyze how a barter system differs from a monetary economy.
3. Evaluate the characteristics that make something suitable as money.

Learning Objectives

• Compare and contrast a barter system with a monetary economy, identifying at least two key differences.
• Explain the three primary functions of money (medium of exchange, unit of account, store of value) using specific economic examples.
• Evaluate the suitability of various items (e.g., shells, digital currency, gold) as money based on established characteristics like durability and divisibility.
• Analyze how the characteristics of money influence its effectiveness in facilitating trade and economic transactions.

Before You Start

Basic Economic Concepts: Scarcity and Choice

Why: Students need to understand that resources are limited, which necessitates efficient methods of exchange like those provided by money.

Introduction to Markets and Trade

Why: Understanding how goods and services are exchanged in simple market settings provides a foundation for appreciating the role of money in facilitating these exchanges.

Key Vocabulary

Medium of Exchange	An item widely accepted as payment for goods and services, eliminating the need for direct barter.
Unit of Account	A standard measure used to set prices and record debts, allowing for easy comparison of value.
Store of Value	An asset that can be saved, retrieved, and exchanged at a later time without deteriorating in value.
Barter System	A system of exchange where goods or services are directly traded for other goods or services without the use of money.
Divisibility	The characteristic of money that allows it to be divided into smaller units for transactions of varying value.

Watch Out for These Misconceptions

Common Misconception

Banks just sit on your money in a big vault.

What to Teach Instead

Banks lend out most of the money they receive to other people and businesses. They only keep a small fraction as a 'reserve.' A 'flow' diagram helps students see that money in a bank is constantly moving through the economy.

Common Misconception

The government owns all the banks.

What to Teach Instead

Most banks in the UK are private, profit-seeking businesses. While the government did take stakes in some banks during the 2008 crisis, they are generally independent. Peer discussion about 'who owns my bank' helps clarify this.

Active Learning Ideas

Simulation Game: The Banking Game

Students act as savers, borrowers, and a bank. Savers deposit 'money' (tokens), and the bank must decide how much to keep in reserve and how much to lend out to borrowers for 'business projects.' This illustrates credit creation and the risk of a 'bank run.'

45 min·Whole Class

Inquiry Circle: The 2008 Crisis

Groups are given different 'clues' about the 2008 financial crisis (e.g., risky mortgages, bank bailouts, falling house prices). They must piece them together to create a 'crime scene' board explaining why the financial system nearly collapsed.

40 min·Small Groups

Think-Pair-Share: Why do we need banks?

Pairs list five things they wouldn't be able to do easily without a bank (e.g., buy a house, get paid, save for the future). They share these to define the key functions of the financial sector.

15 min·Pairs

Real-World Connections

• Consumers use money daily as a medium of exchange when purchasing groceries at Tesco or paying for a bus ticket. They also use it as a unit of account to compare prices between different brands of smartphones.
• Small business owners, like a local bakery, rely on money as a store of value to save profits for future investments or unexpected expenses. They also use it as a unit of account to track revenue and costs.
• Historical examples, such as the use of salt or cowrie shells as currency in different societies, illustrate the evolution of what has been accepted as money and the challenges faced in barter economies.

Assessment Ideas

Exit Ticket

Provide students with three scenarios: 1) A farmer trading chickens for wheat. 2) A shop posting prices for bread. 3) Someone saving money for a car. Ask students to identify which function(s) of money are demonstrated in each scenario and briefly explain why.

Quick Check

Present students with a list of items (e.g., a rare painting, a £10 note, a bitcoin, a bag of apples). Ask them to individually rank these items from most to least suitable as money, providing one reason for their top choice and one reason for their bottom choice, referencing the characteristics of money.

Discussion Prompt

Pose the question: 'Imagine our school operated on a barter system for a week. What problems would students and teachers face in trading goods and services? How would this compare to using money?' Facilitate a class discussion, guiding students to articulate the advantages of money as a medium of exchange and unit of account.

Frequently Asked Questions

What is the main role of a commercial bank?

The main role is to act as an intermediary between savers and borrowers. They provide a safe place for people to store their money and provide loans to individuals and businesses, charging interest to make a profit.

How do banks 'create' money?

When a bank gives a loan, it doesn't usually give out physical cash; it just adds numbers to the borrower's account. This new 'bank credit' acts as money in the economy, effectively increasing the total money supply.

How can active learning help students understand banking?

Active learning, such as a banking simulation, allows students to see the 'magic' and the 'risk' of credit creation. When they see how one person's deposit becomes another person's loan, they understand the interconnectedness of the financial system far better than through a textbook.

What is the role of the Bank of England in the financial sector?

The Bank of England is the 'lender of last resort.' It supervises other banks to make sure they are behaving safely and provides them with emergency funds if they run out of cash, ensuring the whole system remains stable.