Cambridge IGCSE Economics: Money, banking and household spending, saving and borrowing (0455)

This guide teaches sections 3.1 and 3.2 of the Cambridge IGCSE Economics 0455 syllabus for examination in 2026: money (3.1.1), banking (3.1.2) and the influences on household spending, saving and borrowing (3.2.1). The subject is not tiered, so all of it is for everyone. Every country, bank, household and figure below is invented for practice and is not a real statistic.

Related pages: revision notes for this unit, practice questions for this unit, the wider microeconomic decision makers overview, the Cambridge IGCSE Economics hub, the printable checklist and the free diagnostics.

What you must be able to do

Section	Outcome from the syllabus	Where it is taught
3.1.1	The forms, functions and characteristics of money	Section 1
3.1.2	The role and importance of central banks and commercial banks for government, producers and consumers	Section 2
3.2.1	The influences on spending, saving and borrowing, including income, the rate of interest and confidence, between different households and over time	Sections 3 and 4

1. Money (3.1.1)

Money is anything that is generally accepted as payment for goods and services and for the settlement of debts.

Forms of money

• Coins and notes (cash), issued by the central bank or on its authority.
• Bank deposits, which people spend by card, transfer or cheque. In many economies most spending is made from this form.
• Digital and mobile payments, which move deposit money electronically.
• Earlier forms include commodity money, such as metals or shells. These are not money in a modern economy, but they show why money developed.

Why money replaced barter

Barter swaps goods directly. It needs a double coincidence of wants: you must find someone who has what you want and wants what you have. It also needs a separate exchange ratio for every pair of goods.

Worked example. A village market in Country A trades 12 goods by barter.

Exchange ratios needed = n(n - 1)/2 = 12 x 11 / 2 = 66
With money, each good has one price: 12 prices

Money cuts 66 ratios to 12 prices and removes the need for a double coincidence.

Functions of money

Function	Meaning	Example
Medium of exchange	Accepted in return for goods and services	A baker sells bread for notes, then buys flour with them
Measure of value (unit of account)	Lets prices and values be compared	A shirt at 20 units and a book at 10 units: the shirt is worth twice the book
Store of value	Purchasing power can be kept for later	Saving part of this month’s wages
Standard for deferred payment	Debts and future payments are stated in money	A loan repaid in monthly instalments

Money is a weaker store of value when prices rise. In Country A, prices rise by 5% a year and 2,000 units are kept in cash for 2 years.

Purchasing power after 2 years = 2,000 / (1.05 x 1.05) = 2,000 / 1.1025 = 1,814.06 (in today's prices)
Loss = 2,000 - 1,814.06 = 185.94

Characteristics of good money

Characteristic	Why it matters
Acceptability	If sellers refuse it, it cannot be a medium of exchange
Durability	It must survive repeated use; fresh fish fails this test
Portability	Easy to carry and transfer, so high value in a small form
Divisibility	Can pay for cheap and expensive items and give exact change
Scarcity (limited supply)	If anyone can make it, it loses value
Uniformity	Units of the same value must be alike, so they are trusted
Security	Hard to counterfeit, so people keep trusting it

2. Banking (3.1.2)

Central bank

The central bank is the institution that runs a country’s monetary system and stands at the centre of its banks. Ordinary households and firms rarely bank with it directly.

• Issues the country’s notes and coins.
• Keeps the accounts of the government and of the commercial banks.
• Acts as lender of last resort, lending to a commercial bank that cannot meet withdrawals so that savers keep confidence.
• Carries out monetary policy, mainly by setting a key interest rate and influencing the money supply.
• Holds the country’s reserves of foreign currency and can influence the exchange rate.
• Supervises commercial banks, to keep the banking system safe.

Commercial banks

Commercial banks are profit-seeking firms that serve the public and businesses.

• Accept deposits and provide current and savings accounts.
• Lend through loans, mortgages and overdrafts.
• Provide payment services such as cards and transfers.
• Provide safe storage, foreign currency and financial advice.

Worked example. A small bank in Country B holds 600,000 in deposits and lends 420,000 of it at 9%. It pays depositors 2% on all deposits.

Share lent = 420,000 / 600,000 = 70%
Interest received = 420,000 x 0.09 = 37,800
Interest paid = 600,000 x 0.02 = 12,000
Gap before running costs = 37,800 - 12,000 = 25,800

The bank earns its income from the gap between what it charges borrowers and what it pays savers. It keeps the rest of the deposits ready for withdrawals.

Why banks matter to each group

Group	Central bank	Commercial banks
Government	Holds its accounts, helps it borrow and runs monetary policy	Lend to it and handle its payments; they also collect deposits that fund government borrowing
Producers	Keeps the financial system stable, so firms can plan and borrow	Loans and overdrafts for equipment and working capital; business accounts; foreign currency for trade
Consumers	Protects savings through supervision and lender of last resort; keeps the currency trusted	Safe savings, loans, mortgages, cards and payment services

Chain of reasoning for importance: a bank turns many small deposits into large loans, so a producer can buy machinery that no single saver could fund, and output and jobs rise. If the central bank did not stand behind the system, one failure could trigger a run on banks, savers would lose confidence and lending would stop.

Evaluation. Commercial banks gain from lending but risk losses if borrowers default, so the central bank limits the risk through supervision. Low interest rates help borrowers but hurt savers, so the central bank’s choice has winners and losers.

3. What affects spending, saving and borrowing (3.2.1)

Households use income in three ways.

• Spending: buying goods and services now.
• Saving: not spending, keeping some disposable income for the future.
• Borrowing: spending more than current income by using a loan, overdraft or credit.

Disposable income is income after tax and other deductions. Saving = disposable income minus spending.

Income

A rise in income makes room for both more spending and more saving. Better-off households tend to save a bigger proportion. Poorer households spend nearly all, or more than all, of their income because of necessities.

Worked example. Three households in Country C (all figures per month, invented).

	Gross income	Tax	Disposable income	Spending	Saving
Household P	1,800	300	1,500	1,350	150
Household Q	4,600	600	4,000	2,800	1,200
Household R	1,200	0	1,200	1,300	-100

P: spends 1,350/1,500 = 90%, saves 10%
Q: spends 2,800/4,000 = 70%, saves 30%
R: spends 1,300/1,200 = 108.3%, so it borrows 100

Household Q saves 8 times as much as P in money (1,200 / 150) and a larger share. R borrows to cover the gap.

Rate of interest

The rate of interest is the reward for saving and the cost of borrowing, shown as a percentage a year.

Higher rate: saving is more rewarding, so households tend to save more and spend less. Borrowing is costlier, so loans fall. Lower rate: the reverse.

Borrowing 20,000 for a year: at 5% interest = 1,000; at 8% = 1,600 (extra 600)
Saving 3,000 for a year: at 2% earns 60; at 4% earns 120 (extra 60)

Instalment loan: 9,600 borrowed for 2 years at 5% a year (simple interest).

Interest = 9,600 x 0.05 x 2 = 960
Total repaid = 10,560; monthly = 10,560 / 24 = 440

Interest rates matter most for large, long loans such as housing. The effect is weaker if households are already in debt trouble, or if savers care about security more than the reward.

Confidence

Confidence is how secure households feel about future jobs, income and prices. Confident households spend and borrow more, and save less. Worried households cut spending and build a cushion. Confidence can fall because of rising unemployment, news of a downturn or fear of falling prices of assets, and it can move spending even when income does not change.

4. Between households and over time

Between different households

Difference	Effect on spending, saving and borrowing
Level of income	Higher income households save more and a larger share
Age and life stage	Young adults often borrow (education, first home); middle-aged households save for retirement; retired households spend savings
Family size and commitments	More dependants raises necessary spending
Attitudes	Some households prefer saving for security, others spend freely
Access to credit	Households with a steady income and good record borrow more easily

Over time

Worked example. Country C, a household’s average disposable income rises 10% in one year, but its confidence falls.

	Year 1	Year 2
Disposable income	2,000	2,200
Share saved	8%	14%
Spending	1,840	1,892
Saving	160	308

Spending change = (1,892 - 1,840) / 1,840 x 100 = 2.83%
Income up 10%, spending up only 2.83%

Over time, a rise in income, a change in interest rates, a fall in confidence or a household moving into a different life stage all shift the pattern.

Evaluation. A fall in interest rates may fail to raise spending if confidence is low, because worried households may keep saving. Which factor matters most depends on the household: for a low-income household income dominates, for a homeowner with a large loan the rate may matter more.

Common errors

• Writing that money is “wealth” or “income”. Money is what is accepted in payment.
• Listing the functions of a central bank when the question asks about commercial banks.
• Saying a higher rate of interest makes people spend more.
• Treating saving as money “lost”. Saving is income not spent.
• Giving a factor but no chain: say what changes, then what it does to spending, saving or borrowing.

Official syllabus

Cambridge IGCSE Economics 0455 syllabus for examination in 2026, version 2, Cambridge University Press & Assessment (Cambridge Assessment International Education), sections 3.1 Money and banking and 3.2 Households. Practise next with the practice questions and the free diagnostics.