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The Use of Cash and Contactless Payments: Impact on Money Functions

In many economies, the use of cash is declining as people use contactless payments that transfer funds directly between bank deposits.

Explain what represents money in a modern economy and how the use
of contactless payments without the use of cash will affect the functions
of money.

Category:

Microeconomics

CIE AS Level October/November 2022

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Answer

Tips for Answering the Essay⬅:

Start with a strong introduction⬅: Begin your essay with a compelling introduction that clearly presents the topic and provides an overview of what the essay will discuss. In this case, introduce the evolution of money in modern economies and the focus on contactless payments.

Define and explain key concepts⬅: Clearly define and explain the different forms of money in a modern economy, including physical cash, bank deposits, and contactless payments. Ensure that the reader understands the distinctions between these forms and how they contribute to the overall understanding of money.

Address each function of money⬅: When discussing the impact of contactless payments on the functions of money, address each function individually (means of exchange, store of value, unit of account, and standard for deferred payment). Clearly explain how contactless payments affect each function and provide examples or evidence to support your points.

⏩Title⬅: The Evolution of Money in Modern Economies⬅: A Focus on Contactless Payments⏩

⏩Introduction⏩

Money, in its most quintessential form, is a medium that economies use for the exchange of goods and services. In modern economies, the representation of money has notably evolved from its physical form - cash, to more abstract forms such as bank deposits and digital currencies. This shift is increasingly apparent with the growing preference for contactless payments over cash. This essay aims to discuss what constitutes money in today's economy, and how the emergence of contactless payments affects its various functions.

⏩What Represents Money in a Modern Economy⏩

In a modern economy, money is broadly represented in two forms. The first is the narrow measure which includes physical cash – banknotes and coins. This is the most liquid form of money, readily acceptable for transactions. The second is the broad measure, comprised of bank deposits, including savings and checking accounts. These deposits can be transformed into cash or transferred to other accounts, thus representing another key component of money in contemporary economies.

Contactless payments, increasingly incorporated in the definition of money, simply provide another method for moving these bank deposits. They replace cash in exchange for goods or services and largely rely on technology like mobile apps, debit or credit cards without the use of a personal identification number (PIN). This new form of money underscores the evolving digital nature of modern economies.

⏩Impact of Contactless Payments on the Functions of Money⏩

The four primary functions of money include serving as a means of exchange, a store of value, a unit of account, and a standard for deferred payment. The introduction of contactless payments has significant implications on each of these functions.

⏩Means of Exchange⬅:⏩ Contactless payments have enhanced the function of money as a means of exchange. However, this is not without its caveats. The effectiveness of this medium is contingent upon access to technology, which may not be universally available, thus potentially limiting its use as a universal means of exchange.

⏩Store of Value⬅:⏩ The transition to digital payments might alter the 'store of value' function of money. Given the convenience of digital transactions, individuals may be inclined to keep more money in digital form (bank deposits), thereby increasing liquidity. However, risks such as cybercrime or technological glitches could potentially undermine the perceived security of this store of value.

⏩Unit of Account⬅:⏩ The shift to contactless payments does not fundamentally affect money's role as a unit of account. Regardless of the form, money retains its function as the common measure by which the value of goods and services is determined.

⏩Standard for Deferred Payment⬅:⏩ The use of credit cards and bank overdrafts in contactless payments could influence money's role as a standard for deferred payment. By extending virtual credit to users, these platforms potentially promote deferred payments. However, this may also lead to increased indebtedness among consumers, thereby bringing its own set of economic challenges.

⏩Conclusion⏩

The representation of money in modern economies has dramatically evolved, with contactless payments becoming increasingly prominent. While this evolution brings significant conveniences, it also presents new challenges. As the dynamics of cash, bank deposits, and contactless payments continue to shift, it is crucial for economies to adapt and manage the potential implications on the functions of money effectively. The future of money, it seems, is not just digital but also includes a robust understanding and management of the economic impacts of these changes.

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I. Introduction
A. Definition and evolution of money in modern economies
B. Shift from physical cash to digital forms of money
C. Focus on contactless payments as a key development

II. What Represents Money in a Modern Economy
A. Narrow measure⬅: Physical cash (banknotes and coins)
B. Broad measure⬅: Bank deposits (savings and checking accounts)
C. Contactless payments as a new form of money

III. Impact of Contactless Payments on the Functions of Money
A. Means of Exchange
1. Enhancement of money as a means of exchange
2. Limitations of universal access to technology

B. Store of Value
1. Alteration of the "store of value" function
2. Increased liquidity and convenience
3. Risks of cybercrime and technological glitches

C. Unit of Account
1. Continued role of money as a unit of account
2. Determining the value of goods and services

D. Standard for Deferred Payment
1. Influence of credit cards and bank overdrafts
2. Promotion of deferred payments
3. Potential increase in consumer indebtedness

IV. Conclusion
A. Recap of the evolution of money in modern economies
B. Importance of adapting to the changing dynamics of cash, bank deposits, and contactless payments
C. Need for effective management of the implications on the functions of money
D. The future of money as digital and the economic impacts of these changes

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For knowledge and understanding of what represents money in a modern
economy: narrow measure/ cash (1 mark) and broad measure/ bank
deposits/ savings (1 mark) up to 2 marks
For application to explain how contactless payments may be included within in
the definition of money e.g. it is just another method of moving bank deposits
and / or replaces cash in exchange for goods / services (1) and relies on e.g.
mobile phone technology / apps /use of debit / credit cards without use of a
personal identification number (PIN) (1) up to 2 marks
For further application of how this affects the
functions of money (maximum of 3 marks per function discussed).
up to 4 marks

guide:

Money is made up of cash and the
deposits of various types in financial
institutions. Whether these deposits can
fulfil all of the functions of money depends
upon the extent of the liquidity of the
deposit.
Candidates need to identify at least two of
the functions of money from means of
exchange, store of value, unit of account
and standard of deferred payment.
The application must discuss whether or
not the functions are affected by the use of
contactless payments and why. For
example, the means of exchange function
may be affected by access to technology,
the store of value function may be affected
if people need to keep more money on
deposit, the standard of deferred payments
function may be affected by credit cards
and the use of bank overdrafts. Accept any
reasonably well-argued response.

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