What Is Money?

Money is anything widely accepted in an economy for buying goods and services, settling debts, and storing value. It removes the need for barter and allows economic activity to function efficiently.

Functions of money

• Medium of exchange — Money is used to buy and sell goods/services, removing the need for direct exchange (barter).
• Unit of account — Money provides a standard way to measure and compare the value of goods and services (e.g. prices in £).
• Store of value — Money can be saved and used in the future, although inflation can reduce its purchasing power.
• Standard of deferred payment — Money allows debts and credit agreements to be paid in the future (e.g. loans, mortgages).

Characteristics of good money

For money to work effectively, it should be:

• Widely accepted
• Durable
• Portable
• Divisible
• Uniform
• Scarce (limited supply)

Types of money

• Cash (physical money) — Banknotes and coins; legal tender in the UK (within limits).
• Bank money — Money held in bank accounts, existing electronically (e.g. debit balances).
• Electronic money (e-money) — Digital payments via cards, apps and online banking, including contactless and mobile payments.

Role of the central bank

The Bank of England:

• Issues currency
• Controls inflation (interest rates)
• Maintains financial stability

Key limitation

• Inflation — Rising prices reduce the real value of money over time, meaning it buys less than before.