A1: Functions and role of money

What are the four functions of money?

Means of exchange, unit of account, store of value and legal tender.

What is a means of exchange?

Money used to buy and sell goods and services. allows us to trade e.g. £3 for a drink

What is a unit of account?

A way of measuring and comparing the value of goods and services. e.g. a phone costs £500

What is a store of value?

Money can be saved and used to buy things in the future as it keeps its value. e.g. saving £100

What is legal tender?

Legally recognised form of payment. e.g. Bank of England Notes

What is disposable income?

Income left after direct taxes have been deducted.

What is a budget?

A financial plan showing expected income and expenditure over a period of time.

What is expenditure?

Money spent on goods and services.

What is income?

Money received, such as wages, salaries or benefits.

What is inflation?

A general increase in prices over time, reducing the purchasing power of money.

What is purchasing power?

The amount of goods and services that money can buy.

How can inflation affect personal finances?

It increases living costs and reduces the amount people can afford to buy.

How can interest rates affect personal finances?

Higher rates generally increase borrowing costs and can increase returns on savings.

How can life stages affect financial needs?

People's income and spending priorities change as they move through life.

Why is financial planning important?

It helps control spending, avoid debt, prepare for emergencies and achieve financial goals.

What are the factors affecting how people use money

Personal attitudes to risk

Life stages

Culture

Life events

Interest Rates

Inflation