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Medium of exchange and store of wealth are two functions of money - Leaving Cert Economics - Question 3 - 2006
Question 3
Medium of exchange and store of wealth are two functions of money. Explain each of the underlined terms and state ONE other function of money. (a) Medium of excha... show full transcript
Worked Solution & Example Answer:Medium of exchange and store of wealth are two functions of money - Leaving Cert Economics - Question 3 - 2006
Step 1
Explain what is meant by the term 'price inflation'
Answer
Price inflation refers to the sustained increase in the general price level of goods and services in an economy over a period of time. This phenomenon leads to a decrease in the purchasing power of money, meaning that a specific amount of currency will buy fewer goods and services than it did in the past. It is typically measured as an annual percentage increase, using various indices such as the Consumer Price Index (CPI).
Step 2
Old age pensioners
Answer
An increase in price inflation can significantly impact old age pensioners due to their fixed income.
- Decrease in their standard of living: As the cost of living rises, pensioners may find that their income does not stretch as far, leading to a reduced quality of life.
- Increased financial vulnerability: They may be forced to cut back on essential spending, making them more susceptible to financial hardship.
Step 3
Wage demands by workers
Answer
With rising inflation, workers often seek higher wages to maintain their purchasing power.
- Increased wage demands: Employees may demand wage increases that at least match the rate of inflation, as they need to compensate for the higher cost of living.
- Impact on employment: Employers could respond by reducing their workforce or delaying hiring to manage increased costs, potentially resulting in job losses.
Step 4
The government
Answer
An increase in price inflation can also affect government policies and finances.
- Higher demand for public services: Inflation may lead to increased demands on public services, as citizens expect better services to match rising living costs.
- Budget pressures: The government may need to allocate additional funds to meet the wage demands of public sector workers, putting further strain on public finances.
Step 5
Benefits of a fall in interest rates for Borrowers
Answer
A reduction in interest rates translates to a lower cost of borrowing, making it easier for individuals to take loans.
- Cheaper cost of borrowing: As interest rates decrease, less money is needed for repayments, encouraging more households to borrow.
- Increased disposable income: With lower repayments, individuals can have greater disposable income, thus potentially stimulating economic activity.
Step 6
Benefits of a fall in interest rates for Employers
Answer
When interest rates fall, the costs associated with borrowing for businesses decrease.
- Lower costs of production: Employers may benefit from lower business loan rates, enabling them to invest in expansion, improvement of facilities, or new hiring.
- Increased profits: With reduced borrowing costs, businesses can operate more profitably, which can lead to reinvestment in the company.
Step 7
Benefits of a fall in interest rates for Government
Answer
A decrease in interest rates has several implications for government finances and operations.
- National debt management: With lower interest rates, the cost of servicing national debt decreases, allowing governments to allocate more resources to essential services instead of paying interest.
- Increased demand for public services: As individuals are more likely to borrow, consumer spending may rise, leading to higher tax revenues which can be reinvested into public services.