CSS Economics Economics Paper I: Money, Banking, Public Finance and Trade Syllabus

Economics Paper I: Money, Banking, Public Finance and Trade syllabus — full chapter and topic list

Expand any chapter to see its topics and sub-topics. This is the whole examinable outline for Economics Paper I: Money, Banking, Public Finance and Trade in CSS Economics, not a summary of it.

1. 1

   Money and the Monetary System

   3 topics

   • Functions and Evolution of Money
   • Quantity Theory of Money
   • Value of Money and Demand for Money
2. 2

   Banking and Credit Creation

   4 topics

   • Commercial Banks and Functions
   • Central Banking
   • Credit Control Instruments and Interest Rate Structure
   • Monetary Policy and Transmission Mechanism
3. 3

   Public Finance: Revenue and Expenditure

   4 topics

   • Scope of Public Finance
   • Government Expenditure
   • Sources of Government Revenue
   • Privatization as a Revenue Measure
4. 4

   Taxation, Public Debt and Fiscal Policy

   5 topics

   • Principles of Taxation
   • Incidence of Different Taxes
   • Public Debt
   • Deficit Financing
   • Fiscal Policy Objectives and Tools
5. 5

   Welfare Economics and General Equilibrium

   4 topics

   • General Equilibrium Analysis
   • Pareto Optimality and Efficiency
   • Market Failure and Externalities
   • Social Welfare Functions
6. 6

   International Trade Theory

   4 topics

   • Theory of Comparative Advantage
   • Terms of Trade and Gains from Trade
   • Trade Restrictions
   • Free Trade versus Protection
7. 7

   Balance of Payments and Economic Integration

   4 topics

   • Balance of Payments
   • Foreign Exchange Rates
   • Economic Integration
   • International Economic Institutions
8. 8

   Economic Development Theory

   5 topics

   • Concepts of Growth and Development
   • Theories of Development
   • Structural Issues of Development
   • Income Distribution and Poverty
   • Sectoral Development and Environment

Economics Paper I: Money, Banking, Public Finance and Trade flashcards for CSS Economics

22 of 52 cards from the Economics Paper I: Money, Banking, Public Finance and Trade deck — real questions with worked answers.

1. Define money in economic terms and list its four primary functions.

   Money is anything generally accepted as a medium of exchange and a means of settling debts. Its four primary functions are: (1) medium of exchange, (2) measure/unit of value, (3) store of value, and (4) standard of deferred payments.

2. Distinguish between the 'primary' and 'secondary' (derivative) functions of money.

   Primary functions are the medium of exchange and the measure of value. Secondary (derivative) functions are the store of value, standard of deferred payments, and transfer of value. Contingent functions include distribution of national income, basis of credit, and ensuring liquidity.

3. What are the main stages in the evolution of money, in order?

   (1) Barter/commodity exchange, (2) Commodity money (e.g., grain, cattle), (3) Metallic money (gold and silver coins), (4) Paper money (notes), (5) Credit/bank money (cheques, deposits), and (6) Electronic/digital money.

4. What problems of the barter system did money solve?

   It solved (1) the lack of double coincidence of wants, (2) the absence of a common measure of value, (3) the indivisibility of certain goods, (4) the difficulty of storing value, and (5) the difficulty of deferred/contingent payments.

5. State the Quantity Theory of Money (transactions version) in its core proposition.

   The general price level varies directly and proportionately with the quantity of money in circulation, other things remaining constant; i.e., doubling the money supply doubles the price level.

6. Write Fisher's Equation of Exchange and define each term.

   $$MV = PT$$ where $M$ = quantity of money, $V$ = velocity of circulation of money, $P$ = general price level, and $T$ = total volume of transactions (real output of goods and services traded).

7. How is the general price level expressed from Fisher's equation of exchange?

   $$P = \frac{MV}{T}$$ The price level $P$ is directly proportional to money supply $M$ and velocity $V$, and inversely proportional to the volume of transactions $T$.

8. In Fisher's extended equation of exchange, how are bank credit and its velocity incorporated?

   $$MV + M'V' = PT$$ where $M'$ = volume of credit/bank money (demand deposits) and $V'$ = velocity of circulation of credit money.

9. What key assumptions underlie Fisher's Quantity Theory of Money?

   (1) $V$ and $V'$ are constant, (2) $T$ (volume of transactions / full employment output) is constant, (3) $M'$ bears a constant proportion to $M$, (4) money is only a medium of exchange, and (5) the long-run/full-employment context holds.

10. State the Cambridge Cash Balance equation and identify its variables.

    $$M = kPY$$ (or $M = kPT$), where $M$ = money supply, $P$ = price level, $Y$ = real national income/output, and $k$ = the proportion of real income people wish to hold as cash balances.

11. How does the Cambridge cash-balance approach differ from Fisher's transactions approach?

    Fisher emphasizes money as a medium of exchange (flow concept, velocity $V$). The Cambridge approach emphasizes money as a store of value (stock concept), focusing on the demand to hold cash balances ($k$). Note that $k = \frac{1}{V}$.

12. What is the relationship between the Cambridge $k$ and Fisher's velocity $V$?

    They are reciprocals: $$k = \frac{1}{V} \quad\text{and}\quad V = \frac{1}{k}$$ A higher desire to hold cash (larger $k$) means a lower velocity of circulation.

13. What is meant by the 'value of money,' and how does it relate to the price level?

    The value of money is its purchasing power — the quantity of goods and services a unit of money can buy. It varies inversely with the general price level: $$\text{Value of money} = \frac{1}{P}$$

14. According to the Quantity Theory, what is the relationship between the value of money and the quantity of money?

    The value of money varies inversely with its quantity: as the money supply rises, prices rise and each unit of money buys less. $$\text{Value of money} \propto \frac{1}{M}$$ (other things constant).

15. What are the three Keynesian motives for the demand for money (liquidity preference)?

    (1) Transactions motive — money to meet day-to-day expenses; (2) Precautionary motive — money for unforeseen contingencies; (3) Speculative motive — money held to take advantage of expected changes in bond prices/interest rates.

16. In Keynes's liquidity preference theory, how does the speculative demand for money relate to the interest rate?

    Speculative demand $L_2$ is inversely related to the rate of interest: $$L_2 = L_2(r)$$ When interest rates are high, bond prices are low, so people hold bonds (low money demand); when rates are low, money demand rises, approaching the liquidity trap at very low rates.

17. Define a commercial bank.

    A commercial bank is a financial institution that accepts deposits from the public (which are repayable on demand or otherwise) and uses those funds to make loans and investments for profit, while providing payment and other banking services.

18. List the primary functions of a commercial bank.

    (1) Accepting deposits (current, savings, fixed/time, recurring); (2) Advancing loans (cash credit, overdraft, term loans, discounting bills); and (3) Creating credit (credit creation through derivative deposits).

19. List the main types of deposits accepted by commercial banks.

    (1) Demand/current deposits (no interest, withdrawable on demand), (2) Savings deposits (limited withdrawals, low interest), (3) Fixed/time deposits (locked for a term, higher interest), and (4) Recurring deposits.

20. What are the main agency and general utility (secondary) functions of commercial banks?

    Agency functions: collecting cheques/bills, paying bills, fund transfers, acting as trustee/executor. General utility functions: issuing letters of credit, safe-deposit lockers, foreign exchange dealings, underwriting securities, and traveller's cheques.

21. What are the principal systems of note issue? Name them.

    (1) Fixed Fiduciary System, (2) Maximum Fiduciary System, (3) Proportional Reserve System, (4) Minimum Reserve System, and (5) Simple Deposit System.

22. Explain the Fixed Fiduciary System of note issue.

    Under it, the central bank may issue a fixed amount of notes (the fiduciary issue) backed only by government securities; any notes issued beyond that fixed limit must be backed 100% by gold/silver reserves. It was historically used in England (1844 Bank Charter Act).

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