Basic Finance

Midterm Exam

1.What is basic finance? How is it important to you?

The term "Finance" refers to issues including the development, management, and study of money
and investments. It entails employing future income flows to finance current initiatives through
the use of credit and debt, securities, and investment. Finance is strongly tied to the time value of
money, interest rates, and other related topics because of its temporal component.

Finance is important for me because it will help me make better decisions with my money and
will help me keep track of it. Finance is also being used in my everyday life because it helps me
decide how much of my income from Real Estate goes to savings, investments, and also like
making a budget for groceries and the things I want to buy.

2.How money works? How do you think can we cope if money was not introduced?

Money is a liquid asset that is used to promote value-based transactions. It serves as a channel of
communication between people and things. It can measure the value of other items and serves as
both a store of value and a unit of account. If money was not introduced, I don’t think civilization
would improve and modernization will cease to exist because money is an item of value. It allows
us as people and institutions to engage in transactions that result in an exchange of goods and
services.

3.Outline the evolution of money

I. Commodity money- any commodity that was generally demanded and chosen by
common consent was used as a money in the early period of human civilization.
II. Metallic money- metals like gold, silver and copper were used as they could be easily
handled and the quantity can be easily ascertained. It was the main form of money
throughout the major portion of recorded history.
III. Paper money- because was carrying gold was inconvenient and dangerous from place to
place paper money was used. It is lighter and was allowed to use for international trade.
IV. Credit money- people keep a part of their cash as deposits with banks, which they can
withdraw at their convenience through cheques. The cheque (known as credit money or
bank money), itself, is not money, but it performs the same functions as money.
V. Plastic money- in the form of Credit cards and Debit cards. They aim at removing the
need for carrying cash to make transactions.
VI. Online payments and digital currencies

4.What are the properties of money?

 I. Money should be fungible- should be interchangeable with one another
II. Money should be durable- must be able to sustain its value over time
III. Money should be portable- should be easy to carry and divide
IV. Money should be recognizable- should be readily apparent to users
V. Money’s supply should be stable- to prevent fluctuations in value

5.How is money used?

I. Money as a unit of account- can keep track of changes in the value of items over time
and multiple transactions
II. Money as a store of value- it provides a means to store a monetary value for use in the
future without having that value deteriorate
III. Money as a standard of deferred payment- can be used to transfer value over different
time periods in the form of credits and debts

6.What are the different types of money?

I. Market-determined money-
II. Government-issued
III. Fiat currency
IV. Money Substitutes and fiduciary media
V. Cryptocurrencies as money

7.How the gold standard worked?

A monetary system known as the "gold standard" links the value of a nation's currency or paper
money directly to the price of gold. Countries agreed to exchange paper money for a specific
amount of gold under the gold standard. A nation that adheres to the gold standard establishes
a fixed gold price and buys and sells gold at that rate.

8.Differentiate and explain gold, commodity and paper standards?

The gold standard refers to a freely competitive monetary system in which gold or bank receipts
for gold act as the principal medium of exchange; or to a standard of international trade, wherein
some or all countries fix their exchange rate based on the relative gold parity values between
individual currencies. While a commodity standard would ensure price stability and full
employment through the stabilizing effect on aggregate demand of adjustments in the volume of
stocks of monetary commodities. It would also ensure fairness in credits, both long-term and
short -term, and the fairness of trade with other countries. The paper money in circulation is not
convertible into gold or silver. Therefore, paper money standard is known as fiat monetary
standard or managed standard. It is backed by the economic strength of the issuing government.
It derives its value from supply and demand and the stability of the government.