5. Give profound answers to the following questions.

1. How are savings and investment related?

2. What is the purpose of the financial system?

3. What is the role of financial intermediaries in the circular flow of the financial system?

4. Why do businesses and governments often have to borrow or sell equity?

5. What is business finance / personal finance / public finance?

6. What creates public debt?

6. Practise reading §3 of the text. Translate it into Russian. Give a short summary of it.

C. How the text is organised

1. What do these words refer to in the text?

1. these (§3); 2) they (§3); 3) their (§6); 4) which (§7).

2. Find the paragraphs of the text dealing with the following concepts.

1) main areas of finance; 2) the difference between savings and investment; 3) the difference between public and personal finance. 4) finance and financial intermediaries; 5) economic investment and personal investment; 6) finance dealing with family budgets.

V. Speaking

A. Giving your opinion

Explain how you understand the following proverbs.

1. A penny saved is a penny earned.

2. Lend only that which you can afford to lose.

What other proverbs and sayings related to the topic do you know? Share them with your fellow students.

B. Discussion

Work in pairs or groups. Discuss your answers to the following questions.

1. What different spheres do business and public finance operate in?

2. What is taxation? How does it work?

3. Why should consumers compare finance charges and interest rates offered by different financial institutions?

4. Do you agree that people with overdrafts are bad money managers? Why / Why not?

VI. Writing

Write an essay on the following topic.

Compare and contrast factors that consumers should consider when choosing credit lenders for buying clothes versus choosing credit lenders for buying a house or a car. Consider types of credit as well as types of financial institutions.

Unit 9 MONEY

I. Anticipating the Issue

Discuss your answers to the following questions.

1. What is money to your mind?

2. What were the last economic transactions you completed using money? Tuition at the university? A bus fare? A cup of coffee at a cafe?

II. Background Reading

Read the following text. Focus on the meaning of the boldfaced words. Determine whether what you anticipated coincides with the information of the text.

Money

1. What do the following things have in common: cattle, corn, rice, salt, copper, gold, silver, seashells, stones, and whale teeth? At different times and in different places, they have all been used as money. In fact, money is anything that people will accept as payment for goods and services. Whatever it is that people choose to use as money, it should perform four important functions. Therefore money is commonly defined in terms of its functions. Professor Walker’s simple definition clearly brings out these functions:

"Money is a matter of functions four, Medium, Measure, Standard, Store."

Another definition based on its functions can be stated as, 'Money is what money does.'

2. Let’s have a closer look at money in terms of its functions.

Money must serve as a medium of exchange, or the means through which goods and services can be exchanged. Without money, economic transactions must be made through barter – exchanging goods and services for other goods and services. Barter is cumbersome and inefficient because two people who want to barter must at the same time want what the other has to offer. Money allows for the precise and flexible pricing of goods and services, making any economic transaction convenient.

3. Money acts as a common measure of values of all goods and services. In this form money acts as a unit of account. Money also serves as a standard of value, i.e. it determines the economic worth in the exchange process. Finally, money acts as a store of value, i.e. something that holds its value over time. People, therefore, do not need to spend all their money at once and in one place; they can put it aside for later use. They know that it will be accepted wherever and whenever it is presented to purchase goods and services.

4. One situation where money does not function well as a store of value is when the economy experiences significant inflation. Useful money must have the following economic properties:

1. Stability of Value. Money’s purchasing power, or value, should be relatively stable. Rapid changes in money’s purchasing power would mean that money would not successfully serve as a store of value.

2. Scarcity. Money must be scarce to have any value. When the supply of a product outstrips demand, there is a surplus and prices for that product fall. Similarly, when the supply of money outstrips demand, money loses value, or purchasing power.

3. Acceptability. People who use the money must agree that it is acceptable – that it is a valid medium of exchange. In other words, they will accept money in payment for goods and services because others will also accept it as payment.

5. Types of money. Money draws its value from three possible sources. Commodity money derives its value from the type of material which it is made from. Over the course of history gold, silver, precious stones, salt, olive oil, spices and rice have all been valued enough for their scarcity or for their usefulness to be used as money. One problem with commodity money is that if the item becomes too valuable, people will hoard it rather than circulate it, hoping it will become more valuable in the future. Representative money is paper money backed by something tangible – such as silver or gold – that gives its value. One problem with representative money is that its value fluctuates with the supply and price of gold or silver, which can cause problems of inflation and deflation. Fiat money has no tangible backing; it has value only because the government has issued a fiat, an order, saying that this is the case. Fiat money has value because the government says it can be used as money and because people accept that it will fulfill all the functions of legal tender.