OxfordAQA International GCSE Economics: Money and the financial sector (9214)

This guide covers sections 3.2.5.1 (the role of money) and 3.2.5.2 (the role and importance of the financial sector for the economy) of the OxfordAQA International GCSE Economics specification (9214), first teaching September 2023, first examined May/June 2025. The section sits in 3.2, How economies work. There are no tiers, so all of it applies to you. The specification says the importance of money and financial markets to consumers, producers and government will be examined, so each part below ends with what it means for those three groups.

Every country, firm and figure here is invented for illustration. Country A uses a currency called the aru. Nothing below is a real statistic.

Related pages: revision notes, practice questions, fiscal and monetary policy guide, course hub, checklist and free diagnostics.

What you must be able to do

Section	Content	You must be able to
3.2.5.1	Functions of money; definition of money	Explain money as a means of deferred payment, a store of value, a unit of account and a medium of exchange; explain that money is more than banknotes and coins in circulation
3.2.5.2	The financial sector; the role of central banks; other institutions	Identify the main agents (central bank, commercial banks); explain the central bank’s role in influencing interest rates and ensuring stability; explain how commercial banks help fund investment and serve savers and borrowers; describe the role of other institutions

3.2.5.1 The role of money

Money is anything that people will accept in exchange for goods and services and in repayment of what they owe. It is defined by what it does, not by what it is made of. In a barter economy people swap goods directly. That needs a double coincidence of wants, so each trader must hold something the other side wants.

The four functions

Medium of exchange. Money is accepted in every trade, so buyers and sellers do not need to match wants. A baker sells bread for aru and uses the aru to buy flour.

Unit of account. Money is the measure in which prices, wages and debts are stated. This makes comparison easy. Suppose Country A has 5 goods. Under barter each pair needs its own exchange rate, which is 5 × 4 ÷ 2 = 10 rates. With money there are only 5 prices. With 10 goods barter needs 10 × 9 ÷ 2 = 45 rates against 10 prices.

Store of value. Money can be kept and used later, so spending power is carried into the future. It is a good store only if it holds its value. Worked example: a household keeps 1,000 aru in a drawer for a year while prices rise 4%.

• Spending power in today’s prices = 1,000 ÷ 1.04 = 961.54 aru. The household has lost 38.46 aru of spending power.
• If the household instead earns 3% interest, it has 1,000 × 1.03 = 1,030 aru. In today’s prices that is 1,030 ÷ 1.04 = 990.38 aru, a real return of −0.96%.

So money stores value less well when inflation is high, and interest on savings only partly offsets it.

Means of deferred payment. Money allows payment later for something received now. Credit, loans, rent and wages paid at the end of the month all use it. Worked example: a business lends 2,000 aru and is repaid 2,300 aru after a year.

• Interest = 300 aru, which is 300 ÷ 2,000 × 100 = 15%.
• If inflation over the year is 5%, the repayment is worth 2,300 ÷ 1.05 = 2,190.48 aru in today’s prices, so the lender gains 190.48 aru in real terms.
• If inflation is 20%, it is worth 2,300 ÷ 1.20 = 1,916.67 aru, so the lender is worse off by 83.33 aru.

Unexpectedly high inflation therefore harms lenders and helps borrowers. This is why stable prices matter for deferred payment.

Money is more than notes and coins

The specification says money can be defined as more than the banknotes and coins in circulation. Most payments are made by card, transfer or online banking, and the balances behind them are accepted as payment. Money therefore includes balances in bank accounts that can be spent quickly. Broader measures also include savings deposits, which can be turned into spending money.

Country A’s money (illustrative, bn aru):

Form	Amount
Banknotes and coins	12
Current account balances	58
Savings deposits	130
Total, broad measure	200

• Notes and coins share of the broad total = 12 ÷ 200 × 100 = 6%.
• Notes, coins and current accounts = 12 + 58 = 70 bn aru, which is 35% of the total.

A definition limited to notes and coins would leave out 94% of Country A’s money. Liquidity matters: the easier an asset is to spend without loss of value, the more clearly it is money. Cash is the most liquid, then current accounts, then savings deposits, and property is the least liquid.

Why it matters. Consumers can buy and save without barter. Producers can price goods, pay wages and sell on credit. The government can levy taxes and make payments in a single unit.

3.2.5.2 The financial sector

The financial sector is the set of institutions that move money between people who have a surplus (savers) and people who need funds (borrowers). Its main agents are the central bank and commercial banks. Other institutions also play a role.

The central bank

A central bank is the government-backed institution at the head of a country’s banking system. The specification gives two roles.

1. Influencing interest rates. The central bank sets its own policy rate, which is the interest rate that guides the rates banks charge and pay. A change feeds through to the whole economy.

Worked example: a household has a 120,000 aru variable-rate loan at 6%, and a saver has 20,000 aru on deposit at 3%. The central bank cuts its rate by 1 percentage point and banks pass it on in full.

• Loan interest falls from 120,000 × 0.06 = 7,200 to 120,000 × 0.05 = 6,000 aru a year. The borrower saves 1,200 aru a year, or 100 aru a month.
• The saver’s interest falls from 600 to 400 aru, a loss of 200 aru.

Chain of reasoning: lower rates mean cheaper borrowing, so households spend more and firms invest more, which raises aggregate demand. Saving becomes less attractive, so spending is encouraged further. The reverse happens when rates rise, which is used to slow inflation. See the fiscal and monetary policy guide for how this is used as policy.

2. Ensuring the stability of the financial system. If banks fail, savers lose deposits, lending stops and output falls. The central bank therefore supervises banks and can set rules on how much of their own money they must hold. It can also lend to a bank that is short of cash, so that a temporary shortage does not turn into a collapse.

Worked example 1: a Country A bank has 500 mn aru of loans and 25 mn aru of its own funds (capital).

• If 4% of loans are not repaid, the loss is 500 × 0.04 = 20 mn. Capital falls to 5 mn and the bank survives.
• If 6% are not repaid, the loss is 30 mn. This exceeds capital by 5 mn, so the bank cannot cover its losses.

Worked example 2: the same bank holds 400 mn of deposits and keeps 40 mn (10%) in cash.

• If 15% of depositors withdraw, 400 × 0.15 = 60 mn is needed, which is 20 mn more than the cash held.
• If only 10% withdraw, 40 mn is needed and the cash just covers it.

When depositors fear a failure they all withdraw at once (a bank run), and even a sound bank can be unable to pay. Central bank support and clear rules protect confidence.

Why it matters. Consumers get a safe place for savings and cheaper or dearer credit as rates change. Producers see their borrowing costs change. Governments rely on a stable system to carry out policy and to borrow.

Commercial banks

Commercial banks are private firms that take deposits and make loans to customers. The specification names two roles.

Providing a service for savers and borrowers. Savers get a safe place for money and earn interest. Borrowers get loans for homes, education and business. Banks also run accounts and payments.

Worked example: a bank holds 400 mn aru of deposits, pays savers 2% and lends 300 mn at 6%.

• Interest received = 300 × 0.06 = 18 mn aru. Interest paid = 400 × 0.02 = 8 mn aru.
• Gross interest margin = 18 − 8 = 10 mn aru, before wages and other costs.
• It lends 300 ÷ 400 = 75% of deposits and keeps the rest as a reserve for withdrawals.

The bank profits from the gap between the two rates, and it takes the risk that borrowers do not repay.

Helping to fund investment. Firms need money now to buy machines or premises that pay back later. Banks lend savers’ money to firms, turning saving into investment.

Worked example: a small bakery borrows 60,000 aru for an oven at 5% simple interest a year for 4 years (an invented, simplified arrangement).

• Interest = 60,000 × 0.05 × 4 = 12,000 aru. Total repaid = 72,000 aru, or 1,500 aru a month over 48 months.
• The oven adds 21,000 aru of profit a year before interest, which is 84,000 aru over 4 years.
• The bakery gains 84,000 − 72,000 = 12,000 aru, and it also gains extra capacity and may employ more people.

Evaluation: lending supports growth only if it is spent on projects that pay off. If banks lend too freely, borrowers may be unable to repay, which damages the bank and the wider economy. If banks lend too little, good projects are not funded.

Other institutions

The specification asks for the role of other institutions in the financial sector without naming them. Common examples are insurance companies, pension funds, stock markets and credit unions. They move money from savers to users, and they share out risk.

Insurance. Worked example: 1,000 households each pay a premium of 60 aru a year, and on average 1 in 50 suffers a loss of 2,400 aru.

• Premiums = 1,000 × 60 = 60,000 aru.
• Expected claims = 1,000 ÷ 50 = 20 claims, so 20 × 2,400 = 48,000 aru.
• That leaves 12,000 aru to cover the insurer’s costs and profit.

Each household pays a small known amount instead of risking a large loss. Households and firms can then take on activities they would otherwise avoid.

Stock markets. A firm can raise funds by selling shares. A firm issuing 200,000 shares at 5 aru raises 200,000 × 5 = 1,000,000 aru without borrowing. A shareholder who receives a dividend of 0.30 aru per share on a 5 aru share earns a yield of 0.30 ÷ 5 × 100 = 6%. If the price rises to 5.50 aru, the capital gain is 0.50 ÷ 5 × 100 = 10%. Prices can also fall, so shares carry risk.

Why it matters. Consumers can save for retirement and protect themselves from loss. Producers can raise funds and manage risk. Governments can borrow by selling bonds, which are promises to repay with interest.

Common errors

• Defining money as notes and coins only. The specification says it is more than that.
• Listing the four functions without applying them to the scenario in the question.
• Calling the central bank a commercial bank, or saying it lends to the public.
• Saying lower interest rates always raise spending. They are less effective when confidence is low.
• Treating a bank’s deposits as its own money. They are owed to savers.

Official syllabus

OxfordAQA International GCSE Economics (9214), specification version 1.0, for exams May/June 2025 onwards, published by OxfordAQA. Sections 3.2.5.1 and 3.2.5.2.