Definition
Currency consists of several forms of money that are circulating within an economy, facilitating the exchange of goods and services. It can be classified into three major categories:
- Circulating Money: Any kind of money that is currently being used in an economy for transactions.
- Medium of Exchange: Includes various instruments such as coins, banknotes, cheques, and promissory notes.
- Official Monetary Units: The recognized money in official use within a particular country.
Currency plays a pivotal role in the economy, allowing for the smooth facilitation of trade and commerce.
Examples
-
Coins and Banknotes:
- US Dollar (USD)
- Euro (EUR)
- British Pound (GBP)
-
Bank Instruments:
- Cheques
- Bills of Exchange
- Promissory Notes
-
Foreign Exchange:
- Japanese Yen (JPY) being used in international transactions.
- A business in Europe accepting US Dollars for import payments.
-
Time to Maturity:
- A bill of exchange maturing after 90 days.
Frequently Asked Questions (FAQs)
Q1: What is the primary function of currency?
Currency serves as a medium of exchange, facilitating transactions between individuals and entities by providing a common ground for value.
Q2: How is currency different from money?
While money includes anything that can be used as a medium of exchange, store of value, or unit of account, currency specifically refers to the physical forms of money—coins and paper bills.
Q3: What is the role of foreign exchange in currency?
Foreign exchange involves trading different currencies in the global market, allowing for international transactions and investment.
Q4: Can digital forms of money be considered currency?
Yes, digital forms like cryptocurrency can be considered currency if they are widely accepted as a medium of exchange.
- Foreign Exchange (Forex): The global marketplace for trading national currencies against one another.
- Bill of Exchange: A written order used primarily in international trade that binds one party to pay a fixed sum of money to another party at a predetermined future date.
- Promissory Note: A financial instrument containing a written promise by one party to pay another party a definite sum of money either on demand or at a specified future date.
Online References
- Investopedia on Currency: Understanding Currency
- Foreign Exchange Basics: Forex Market
- Fundamentals of Bills of Exchange: Bill of Exchange
Suggested Books for Further Studies
- Money, Banking, and Financial Markets by Stephen G. Cecchetti and Kermit L. Schoenholtz
- Foreign Exchange: A Practical Guide to the FX Markets by Tim Weithers
- Currency Trading For Dummies by Kathleen Brooks and Brian Dolan
Accounting Basics: Currency Fundamentals Quiz
### What is the primary function of currency in an economy?
- [x] Medium of exchange
- [ ] Store of value
- [ ] Unit of account
- [ ] None of the above
> **Explanation:** Currency serves primarily as a medium of exchange, facilitating transactions between individuals and businesses.
### Which of these is NOT considered a form of currency?
- [ ] Banknotes
- [ ] Coins
- [x] Real estate
- [ ] Cheques
> **Explanation:** Real estate is not considered a form of currency. Currency includes coins, banknotes, and other instruments like cheques.
### What is the correct term for money officially used in a particular country?
- [ ] Forex
- [ ] Bitcoin
- [x] Official monetary units
- [ ] Barter system
> **Explanation:** The term "official monetary units" refers to the recognized money in official use within a particular country.
### How does currency facilitate international trade?
- [ ] By serving as a store of value
- [x] Through foreign exchange markets
- [ ] By acting as a unit of account only
- [ ] By eliminating the need for transactions
> **Explanation:** Currency facilitates international trade through foreign exchange markets, allowing for the buying and selling of foreign currencies.
### Which of the following could be classified as a bill of exchange?
- [ ] Coins
- [ ] Cryptocurrency
- [x] A written order to pay a certain sum at a future date
- [ ] Barter agreements
> **Explanation:** A bill of exchange is a written order used in trading that binds one party to pay a fixed sum of money to another party at a predetermined future date.
### What type of currency involves using digital or virtual money?
- [x] Cryptocurrency
- [ ] Banknotes
- [ ] Cheques
- [ ] Coins
> **Explanation:** Cryptocurrency involves the use of digital or virtual money, which is encrypted for security.
### How is a 'promissory note' different from a 'bill of exchange'?
- [ ] It is issued by banks only.
- [ ] It cannot be used in international trade.
- [x] It contains a written promise to pay, rather than an order.
- [ ] It must be paid immediately upon issuance.
> **Explanation:** A promissory note contains a written promise by one party to pay another party a definite sum of money either on demand or at a specified future date, whereas a bill of exchange contains an order to pay.
### Which of the following is an example of foreign exchange?
- [ ] Using paper money within your home country
- [x] Converting USD to JPY for an international transaction
- [ ] Paying with a cheque in a local store
- [ ] Bartering goods in the market
> **Explanation:** Foreign exchange refers to the process of converting one country's currency into another, such as converting USD to JPY for international transactions.
### What constituent often affects the exchange rate between two currencies?
- [x] Economic stability
- [ ] Physical size of the country
- [ ] Number of languages spoken
- [ ] Average temperature
> **Explanation:** Economic stability often affects exchange rates between two currencies, influencing global confidence and demand.
### Why is currency critical in an economic system?
- [ ] It avoids the need for digital banking.
- [ ] It is used exclusively for saving.
- [x] It provides a standard medium for exchange, facilitating trade and commerce.
- [ ] It replaces all forms of barter.
> **Explanation:** Currency is critical as it provides a standard medium for exchange, facilitating trade and commerce within an economy.