Do you know your money Match the correct

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Do you know your money? Match the correct colour and picture on the back

Do you know your money? Match the correct colour and picture on the back to each bank note OCR GC SE E C ONOMI CS J 20 5/ 1 £ 5 Purple Sir John Houlbon 1 st Governor of the Bank of England £ 10 Blue Sir Edward Elgar Composer £ 20 Red Elizabeth Fry Prison Reformer £ 50 Brown Charles Darwin Naturalist Topic 2: The role of markets and money 2. 8 The role of money and financial markets

2. 8 T HE ROLE OF MONEY AND FINANCIALMARKETS IN THIS UNIT YOU WILL

2. 8 T HE ROLE OF MONEY AND FINANCIALMARKETS IN THIS UNIT YOU WILL LEARN: explain the role of money as a medium of exchange explain the role of the financial sector for the economy, including financial institutions such as banks, building societies and insurance companies evaluate the importance of the financial sector for consumers, producers and government analyse how different interest rates affect the levels of saving, borrowing and investment calculate the effect on savings and borrowings of changes in the rate of interest

D EFINITIONOF MONEY What would Jane Austen think of being on the new £

D EFINITIONOF MONEY What would Jane Austen think of being on the new £ 10 note? Money has a range of definitions A broad definition of money would be anything that is widely accepted as a medium of exchange for goods and services A narrower definition is anything that is seen as fiat money, declared legal tender by the government of a country e. g. notes and coins in circulation Therefore, it must be accepted in exchange for goods and services The spectrum of liquidity shows how close money is to cash, and therefore how easy to use as payment for goods and services, or liquid, it is Cash is very liquid, property is very illiquid i. e. not easy to turn into cash Current accounts Savings accounts Shares Machinery Property

T HE USE OF MONEY A medium of exchange In today’s economy, we use

T HE USE OF MONEY A medium of exchange In today’s economy, we use notes and coins as money, rather than barter as a medium of exchange Money enables goods and services to be exchanged, transactions to be settled and debts to be paid Money avoids the problems of barter, principally the double coincidence of wants Barter is inefficient and would suppress specialisation and the division of labour

T HE ROLE OF THE FINANCIALSECTOR The financial sector is the range of institutions

T HE ROLE OF THE FINANCIALSECTOR The financial sector is the range of institutions that provide services to retail and commercial customers within the economy They allow transactions to be made This entails incurring and settling debt They include: Banks Building societies Insurance companies

T HE ROLE OF BANKS IN HELPINGTO FUND INVESTMENTAND PROVIDINGA SERVICEFOR SAVERSAND BORROWERS These

T HE ROLE OF BANKS IN HELPINGTO FUND INVESTMENTAND PROVIDINGA SERVICEFOR SAVERSAND BORROWERS These are known as commercial or retail banks e. g. Barclays, HSBC & Nat. West Their main customers are members of the general public They have 3 core functions: 1) accepting deposits in order provide security and to facilitate saving 2) lending money to different economic agents who wish to borrow 3) providing an efficient means of payment and transferring funds between different economic agents

T HE ROLE OF BANKS IN HELPINGTO FUND INVESTMENTAND PROVIDINGA SERVICEFOR SAVERSAND BORROWERS They

T HE ROLE OF BANKS IN HELPINGTO FUND INVESTMENTAND PROVIDINGA SERVICEFOR SAVERSAND BORROWERS They also provide some other services to customers such as: foreign exchange and insurance services They typically have extensive branch networks, although in the modern economy many banking services are available online and through mobile technology Commercial banks are in business to make profit for their shareholders through the provision of banking services to their customers They can also help firms raise finance for investment: Providing loans to firms in order to invest Giving advice, arranging the new issues of shares and helping firms to manage the risk in doing so However, this last point is mainly undertaken by investment banks

T HE ROLE OF BUILDINGSOCIETIESIN HELPINGTO FUND INVESTMENTAND PROVIDINGA SERVICEFOR SAVERSAND BORROWERS Building societies

T HE ROLE OF BUILDINGSOCIETIESIN HELPINGTO FUND INVESTMENTAND PROVIDINGA SERVICEFOR SAVERSAND BORROWERS Building societies are financial institutions that provide financial services to their members They are a type of mutual institution, or mutual, where the firm is owned by its customers This entitles customers a share of profits, normally in the form of a dividend In particular, building societies offer mortgages They receive money from members, who are paid interest and this is lent out to members, who pay interest They are a direct competitor to the high street banks

T HE ROLE OF INSURANCECOMPANIES Insurance companies provide financial protection against loss e. g.

T HE ROLE OF INSURANCECOMPANIES Insurance companies provide financial protection against loss e. g. damage to cars and houses or theft to individuals, firms and government. In return, they are paid a monthly premium This provides peace of mind for those taking out the insurance policy Sometimes, such as when driving a car, insurance is mandatory However, policyholders often pay for something that they never use Policy excesses, when the policyholder has to pay towards the cost, may reduce the benefit

W HAT IS MEANT BY AN INTERESTRATE? How might different interest rates impact on

W HAT IS MEANT BY AN INTERESTRATE? How might different interest rates impact on you? The interest rate is the price of money the cost of borrowing the reward for saving If interest rates increase demand will rise If interest rates decrease demand will fall The cost of borrowing is more expensive, so demand falls Saving becomes more attractive, so spending falls The cost of borrowing is less expensive, so demand rises Saving becomes less attractive, so spending rises There a range of interest rates e. g. Bank of England, bank loans, credit cards, store cards etc.

W HAT IS MEANT BY AN INTERESTRATE? If I buy a can of Coca-Cola

W HAT IS MEANT BY AN INTERESTRATE? If I buy a can of Coca-Cola it might cost me 70 p for the right to do so If I buy borrow £ 1 000 from the bank for one year it might cost me £ 50 for the right to do so So the price of borrowing £ 1 000 would be £ 50 or 5% This 5% is my interest rate A small business borrows £ 17 000 at an interest rate of: a) 2% b) 5% c) 8% d) 12% How much does the business have to pay back in interest after one year for each interest rate?

T HE FACTORSTHAT INFLUENCETHE DIFFERENTRATES OF INTEREST Interest rates are influenced by a variety

T HE FACTORSTHAT INFLUENCETHE DIFFERENTRATES OF INTEREST Interest rates are influenced by a variety of factors, including: The demand supply for credit What influences on interest rates can you identify from this talk by Mark Carney, Governor of the Bank of England? If there is high demand for borrowed funds then the interest rate will be higher and vice versa If there is a low availability of funds to borrow the interest rate will be higher and vice versa Bank of England’s Base Rate This is the rate at which the Bank of England lend to commercial banks such as Barclays and HSBC If this increases, these banks have to pay more to borrow money. They therefore pass this on to the consumer in the form of higher interest rates

T HE FACTORSTHAT INFLUENCETHE DIFFERENTRATES OF INTEREST Interest rates are influenced by a variety

T HE FACTORSTHAT INFLUENCETHE DIFFERENTRATES OF INTEREST Interest rates are influenced by a variety of factors, including: State of the economy Inflation What was the UK’s interest rate in June 2017? Has it changed? If so is this change good or bad for businesses who rely on overdrafts and loans. In a stable economy, with high levels of employment, demand for funds is likely to be higher, as individuals and firms seek to consume and invest If inflation increases so will interest rates. If the rate of interest is lower than the rate of inflation lenders will be losing money in real terms. If the inflation rate is 5% and the interest rate is 4% then lenders are actually losing money. Therefore, they will look to raise interest rates as the rate of inflation rises

H OW CHANGESIN INTERESTRATES AFFECTCONSUMERS ’ DECISIONSTO SAVE, BORROWOR SPEND Changes to interest rates

H OW CHANGESIN INTERESTRATES AFFECTCONSUMERS ’ DECISIONSTO SAVE, BORROWOR SPEND Changes to interest rates will affect the demand for goods and services Consumers will receive interest on their savings Consumers may buy on credit e. g. hire purchase, loan or credit card If interest rates are high consumers may be tempted to save rather than spend Interest rates will affect the attractiveness of borrowing money; higher rates lead to lower demand Higher interest rates will mean that consumers who already have loans will have less disposable income e. g. higher mortgage repayments lead to a fall in demand for other products

H OW CHANGESIN INTERESTRATES AFFECTCONSUMERS ’ DECISIONSTO SAVE, BORROWOR SPEND Changes to interest rates

H OW CHANGESIN INTERESTRATES AFFECTCONSUMERS ’ DECISIONSTO SAVE, BORROWOR SPEND Changes to interest rates will affect the demand for goods and services Consumers will increase spending if interest rates are low As interest rates fall it becomes more attractive to borrow money. This will impact on buying expensive items such as houses, cars and electrical goods.

A CTIVITY Look at the items of expenditure below. Rank these in order to

A CTIVITY Look at the items of expenditure below. Rank these in order to show likely it is demand will fall for them if interest rates go up. Justify your ranking. Milk, cigarettes, daily newspaper, freezer, petrol, cinema tickets, restaurant meal, new car, school shoes, designer jacket, gym membership, packet of crisps, sofa, light bulbs, organic vegetables, DIY equipment

H OW TO CALCULATEINTERESTON SAVINGS Simple interest occurs when the amount of interest paid

H OW TO CALCULATEINTERESTON SAVINGS Simple interest occurs when the amount of interest paid is fixed £ 1000 is deposited in a bank account The interest rate is 3% annually How much interest is earned in three years? £ 1000 x 0. 03 = £ 30 per year £ 30 x 3 years = £ 90 There is no compounding of interest

H OW TO CALCULATEINTERESTON SAVINGS "Fidelity Fiduciary Bank" Compound interest occurs when the amount

H OW TO CALCULATEINTERESTON SAVINGS "Fidelity Fiduciary Bank" Compound interest occurs when the amount of interest is paid on both the fixed deposit and the interest accrued £ 1000 is deposited in a bank account The interest rate is 3% annually How much interest is earned in three years? £ 1000 x 1. 033 £ 1092. 73 - £ 1000 = £ 92. 73 1. 03 shows 3% interest rate, the power of 3 shows the number of years

A CTIVITY As you watch this video produce a mind map to summarise the

A CTIVITY As you watch this video produce a mind map to summarise the affects on business and consumers of fluctuating interest rates.

2. 8 T HE ROLE OF MONEY AND FINANCIALMARKETS IN THIS UNIT YOU SHOULD

2. 8 T HE ROLE OF MONEY AND FINANCIALMARKETS IN THIS UNIT YOU SHOULD HAVE LEARNT: explain the role of money as a medium of exchange explain the role of the financial sector for the economy, including financial institutions such as banks, building societies and insurance companies evaluate the importance of the financial sector for consumers, producers and government analyse how different interest rates affect the levels of saving, borrowing and investment calculate the effect on savings and borrowings of changes in the rate of interest