Cambridge IGCSE Economics: Money, banking and household saving and borrowing (0455) – Revision Notes

These notes condense sections 3.1.1, 3.1.2 and 3.2.1 of the Cambridge IGCSE Economics 0455 syllabus for examination in 2026. For full explanations and longer worked examples, read the study guide. Then test yourself with the practice questions. Other links: the Cambridge IGCSE Economics hub, the printable checklist and the free diagnostics. All figures here are invented for revision and are not real statistics.

Key definitions

Term	Definition to learn
Money	Anything generally accepted in payment for goods, services and debts
Barter	Swapping goods directly, with no money
Double coincidence of wants	Each trader has what the other wants, at the same time
Medium of exchange	Money accepted in return for goods and services
Measure of value	Money used to state and compare prices
Store of value	Money keeps purchasing power until it is spent later
Standard for deferred payment	Debts and future payments are stated in money
Central bank	The country’s main monetary authority and banker to government and banks
Commercial bank	A profit-seeking bank serving households and firms
Lender of last resort	The central bank lends to a bank in difficulty so confidence is kept
Disposable income	Income after tax and other deductions
Saving	Disposable income not spent
Borrowing	Spending more than current income, using credit
Rate of interest	The reward for saving and the cost of borrowing, as a percentage a year
Confidence	How secure households feel about jobs, income and prices

Money at a glance

Forms: coins and notes, bank deposits, digital payments. Commodity money is an older form.

Functions: medium of exchange, measure of value, store of value, standard for deferred payment.

Characteristics: acceptable, durable, portable, divisible, scarce, uniform, secure.

If a good is…	The money characteristic it fails
Rejected by shops	Acceptability
Perishable	Durability
A heavy block of stone	Portability
Only available in one large size	Divisibility
Easy for anyone to copy or find	Scarcity or security
Different in quality from one unit to the next	Uniformity

Worked reminder: barter ratios

Formula: goods n, ratios needed by barter = n(n - 1)/2; prices with money = n.

7 goods: 7 x 6 / 2 = 21 ratios by barter, but only 7 prices with money

Worked reminder: inflation and the store of value

Prices rise 8% in a year. Cash of 1,000 buys goods worth 1,000 / 1.08 = 925.93 in last year’s prices. Money loses some of its function as a store of value when prices rise.

Banking at a glance

Central bank	Commercial banks
Issues notes and coins	Accept deposits (current and savings accounts)
Banker to the government	Lend (loans, mortgages, overdrafts)
Banker to commercial banks	Payment services (cards, transfers)
Lender of last resort	Safe storage, foreign currency, advice
Monetary policy: key interest rate, money supply	Aim to make a profit
Holds foreign currency reserves	Stand between savers and borrowers
Supervises banks	Rely on the central bank in a crisis

Importance for each group

• Government: the central bank holds its accounts and helps it borrow; commercial banks handle payments and lend to it; monetary policy helps it pursue its aims.
• Producers: loans and overdrafts pay for equipment, stock and wages; business accounts and foreign currency support trade; a stable system makes planning possible.
• Consumers: safe place to save; loans and mortgages; payment services; the central bank protects savings through supervision and keeps the currency trusted.

Method: explaining a bank’s importance

1. Name the function (for example, lending to firms).
2. Say what it allows the group to do.
3. Link to an outcome (output, jobs, spending, stability).
4. Add a limit if asked to evaluate: default risk, high interest, or reliance on confidence.

Worked reminder: bank income

A bank in Country D lends 250,000 at 8% and holds 400,000 of deposits paying 1.5%.

Interest received = 250,000 x 0.08 = 20,000
Interest paid = 400,000 x 0.015 = 6,000
Gap before costs = 20,000 - 6,000 = 14,000

Households at a glance

Influence	Higher	Lower
Income	More spending, more saving, a bigger share saved	Less saving; more borrowing if spending is necessary
Rate of interest	More saving, less borrowing and spending	More borrowing and spending, less saving
Confidence	More spending and borrowing, less saving	More saving, less spending and borrowing

Between households and over time

• Between households: differences in income, age and life stage, family size, attitudes to risk, wealth and access to credit.
• Over time: changes in income, interest rates and confidence, and the household ageing.

Formulas

Quantity	Formula
Disposable income	Gross income minus tax and other deductions
Saving	Disposable income minus spending
Saving ratio (%)	Saving / disposable income x 100
Interest on a loan for one year	Loan x rate
Percentage change	Change / original x 100

Worked reminders

Saving ratio: disposable 3,200, saving 400 -> 400 / 3,200 x 100 = 12.5%
Interest-only housing loan of 150,000: at 3% = 4,500 a year; at 5% = 7,500
   Extra cost = 3,000 a year = 250 a month
Overdraft of 1,500 at 15% a year for 4 months = 1,500 x 0.15 x 4/12 = 75
Spending falls from 2,400 to 2,280 -> (2,280 - 2,400)/2,400 x 100 = -5%

Method: a chain of reasoning on interest rates

1. The rate of interest rises.
2. Borrowing costs more, so fewer households borrow and repayments rise.
3. Saving earns more, so some households save more.
4. Spending on goods and services falls.
5. Evaluate: the effect depends on how large the rise is, whether households are already in debt, and their confidence.

Must-know distinctions

• Money and income: money is what is accepted in payment; income is a flow earned over time.
• Central and commercial banks: the central bank serves government and banks and sets policy; commercial banks serve the public and firms to make a profit.
• Saving and borrowing: saving is income not spent; borrowing is spending beyond income.
• Income and confidence: income gives the ability to spend; confidence gives the willingness.
• Share and amount: a rich household may save more money but a similar share.

Quick self-test

1. State the four functions of money.
2. Why is livestock a poor form of money?
3. By barter, how many exchange ratios do 10 goods need, and how many prices with money?
4. State two roles of the central bank that a commercial bank does not perform.
5. State two services a commercial bank gives to producers.
6. A household has disposable income of 2,600 and spends 2,236. Calculate its saving ratio.
7. A loan of 30,000 for one year is charged 4% then 7%. Calculate the extra interest.
8. Explain why higher confidence may increase borrowing.
9. A household’s spending rises from 1,600 to 1,720. Calculate the percentage change.
10. Give two reasons why two households with the same income may save different amounts.

Answers

1. Medium of exchange, measure of value, store of value, standard for deferred payment.
2. Not durable or divisible, hard to carry, and not uniform (animals differ).
3. 10 x 9 / 2 = 45 ratios by barter; 10 prices with money.
4. Any two: issue notes and coins; lender of last resort; set monetary policy; banker
   to commercial banks; hold reserves of foreign currency.
5. Any two: loans, overdrafts, business accounts, payment services, foreign currency.
6. Saving = 2,600 - 2,236 = 364; 364 / 2,600 x 100 = 14%.
7. 30,000 x 0.04 = 1,200; 30,000 x 0.07 = 2,100; extra = 900.
8. Confident households expect secure jobs and income, so they are more willing to take on repayments.
9. (1,720 - 1,600)/1,600 x 100 = 7.5%.
10. Any two: age or life stage, family size, attitude to risk, existing debts, expectations.

Evaluation prompts to have ready

• Do lower interest rates always raise spending? No. If households are worried about jobs, they may keep saving, and if banks lend cautiously, borrowers may not get the credit.
• Is the central bank more important than commercial banks? The central bank keeps the system stable and trusted, but commercial banks deliver the day-to-day saving, lending and payments that households and firms use.
• Does a higher income always mean more saving? Usually more in money terms, but a household with heavy commitments or a pessimistic outlook may save little.
• Is cash still the best form of money? Cash is widely accepted and needs no technology, but deposits and digital payments are safer to carry and easier to move in large amounts.

Always finish an evaluation with a judgement and a reason for it.

Where marks are usually lost

• Describing a function of money but not saying what it means in use, with an example.
• Mixing up the “measure of value” function with the “store of value” function.
• Naming a characteristic of money without linking it to why it matters for payment.
• Writing about the central bank when asked about commercial banks, or the reverse.
• Listing roles for “government, producers and consumers” without addressing each group.
• Saying that higher interest rates “increase” borrowing.
• Showing a calculation with no units or no working, or using gross instead of disposable income.
• Giving “income” as a reason for differences between households but not saying which way it pushes saving or borrowing.
• Stopping at one step of the chain, instead of showing what it does to spending.
• Evaluating with a bare “it depends”, without naming what it depends on.

Official syllabus

Cambridge IGCSE Economics 0455 syllabus for examination in 2026, version 2, Cambridge University Press & Assessment (Cambridge Assessment International Education), sections 3.1.1, 3.1.2 and 3.2.1.