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Detailed notes on Microeconomic decision makers for Cambridge IGCSE Economics, covering key concepts, explanations, examples, and exam-focused revision points.
The institutional plumbing of an economy. Money's four functions; commercial banks vs central banks; trade unions and the labour market.
Mapped to the Cambridge IGCSE 0455 syllabus (2026).
MUSS: medium, unit, store, standard.
Money is anything generally accepted in payment. The DEFINITION focuses on acceptance — not on physical form.
The four functions of money (mnemonic: MUSS):
1. Medium of exchange. Money is exchanged for goods and services, replacing barter. Without money, every transaction would require a 'double coincidence of wants' — I have what you want AND you have what I want.
2. Unit of account (measure of value). Prices are quoted in money terms, allowing comparison. A car at 20,000vsamealat20 — same units, easy comparison.
3. Store of value. Money can be saved and used later. (This function is undermined by inflation — saved money loses purchasing power.)
4. Standard of deferred payment. Allows lending and borrowing — debts denominated in money to be repaid later.
Forms of money.
| Form | Example |
|---|---|
| Cash (currency) | Coins and notes |
| Bank deposits | Current accounts, savings accounts |
| Electronic / digital | Bank transfers, debit/credit cards |
In modern economies, MOST money is bank deposits, not cash. The 'money supply' includes both.
Cambridge tip. Mark schemes for "functions of money" expect ALL FOUR. Memorise MUSS. Each function should have a brief example or explanation for full marks.
Commercial = profit + everyday banking. Central = government + monetary policy.
Commercial banks (e.g., Barclays, HSBC, Bank of America).
Profit-seeking institutions providing banking services to the public.
Three core functions:
Central bank (e.g., Bank of England, US Federal Reserve, European Central Bank).
Government-owned. Does NOT take deposits from the public. Has different responsibilities:
Five functions:
Cambridge tip. Mark schemes consistently penalise candidates who confuse commercial banks with the central bank. The central bank does NOT take deposits from individuals.
Workers' organisations negotiating pay and conditions. Trade-offs apply.
A trade union is an organisation of workers that negotiates with employers on behalf of its members. The aim: better pay, conditions, and job security.
How unions raise wages:
1. Collective bargaining. Negotiating AS A GROUP is more powerful than individual negotiation. The threat of STRIKE (work stoppage) raises union bargaining power.
2. Restricting labour supply. Through entry requirements (apprenticeships, qualifications, certifications) or limits on hours, unions reduce the supply of qualified workers — raising the equilibrium wage. e.g., the legal profession limits entry, raising lawyer wages.
3. Lobbying for protective legislation. Minimum-wage laws, working-time directives, employment protection.
Advantages of trade unions:
Disadvantages of trade unions:
Cambridge tip. Examiner reports praise candidates who BALANCE the discussion — recognising both worker protection and economic costs. One-sided answers cap at the lower bands.
Verbatim phrases and definitions Cambridge mark schemes credit.
Money/banking/trade unions appear regularly on Paper 1 (definitions, functions) and Paper 2 (evaluation of trade unions). Examiner reports flag the commercial-vs-central confusion and one-sided trade-union analysis as common errors.
Sources: Cambridge IGCSE Economics 0455 syllabus (for examination from 2024 onwards); 0455 Examiner Reports — Paper 1 / Paper 2, 2022-2024; 0455/22 May/Jun 2024 question paper and mark scheme. Last reviewed 2026-05-07.
Step-by-step solutions to past-paper-style questions on money, banking_trade unions, written exactly the way a tutor would explain them at the board.
Question
Define what is meant by 'money'. (2 marks)
Step-by-step solution
Step 1
'Define' is point-marked (up to 2).
Step 2
The idea (1 + 1). Money is anything generally accepted as a means of payment for goods and services (1) — its key feature is general acceptability, not its physical form (1).
Answer
Money is anything that is generally accepted as a means of payment for goods and services and in settlement of debts (1); the key feature is general acceptability, so it includes notes, coins and bank deposits (1).
Examiner tip
One mark for 'generally accepted as a means of payment', one for the developing idea (general acceptability / not just cash). Money is defined by its functions, not its physical form.
Question
Explain two functions of money. (4 marks)
Step-by-step solution
Step 1
Medium of exchange (2 marks). Money is accepted in payment for goods and services, so people do not need to barter (swap goods directly) — this makes trade much easier.
Step 2
Store of value (2 marks). Money can be saved now and spent later, because it keeps its value over time (though inflation reduces this) — letting people save.
Answer
Medium of exchange (2): money is generally accepted in payment for goods and services, so people can buy and sell without barter (directly swapping goods), which makes trade far easier. Store of value (2): money can be saved and used later because it holds its value over time, allowing people to save and plan — although inflation weakens this function. (Other functions: a unit of account/measure of value, and a standard of deferred payment.)
Examiner tip
Each function named + explained with why it is useful. The four functions are medium of exchange, unit of account, store of value, and standard of deferred payment — know all four.
Question
Analyse how two functions of a commercial bank help the economy. (6 marks)
Step-by-step solution
Step 1
Function 1 — accepting deposits (up to 3). Banks provide a safe place to save, paying interest → people save more, and the bank gathers funds it can lend on.
Step 2
Function 2 — lending (up to 3). Banks lend the deposited money to households and firms → households can buy houses/cars; firms can invest in equipment and expand → this increases spending, output and jobs in the economy.
Step 3
Develop (link). By channelling savings into loans, banks help the economy grow and make payments easier (cards, transfers).
Answer
First, accepting deposits. Commercial banks give people a safe place to keep their money and pay interest on savings, so they encourage saving and gather large pools of funds. Second, lending. Banks lend these deposited funds to households and firms: households can borrow to buy homes and cars, and firms can borrow to invest in machinery and expand their businesses. This lending increases spending, investment, output and jobs, helping the economy grow. By channelling savings into productive loans — and by providing payment services like cards and transfers — commercial banks make the whole economy work more smoothly. So accepting deposits and lending are central to economic activity.
Examiner tip
6-mark 'Analyse': develop two bank functions (deposits → safe saving → funds; lending → investment → growth/jobs), each as a chain to a benefit for the economy. The deposit-to-loan channel is the key idea.
Question
Analyse how a trade union could try to raise the wages of its members. (6 marks)
Step-by-step solution
Step 1
Method 1 — collective bargaining (up to 3). The union negotiates as a group on behalf of all its members → this gives far more bargaining power than a single worker → it can press the employer for higher wages, backed by the threat of strike action.
Step 2
Method 2 — restricting the supply of labour (up to 3). Through entry requirements (qualifications, apprenticeships) the union can reduce the supply of workers in the trade → with labour scarcer, the wage rises (demand and supply of labour).
Step 3
Develop (link). The union's power depends on how essential the workers are and how easily they can be replaced.
Answer
A trade union can try to raise its members' wages in two main ways. First, collective bargaining. The union negotiates with the employer on behalf of all its members at once, which gives it far more bargaining power than an individual worker would have. Backed by the threat of strike action (which would stop production), it can press the employer to agree to higher wages. Second, restricting the supply of labour. By controlling entry into the trade — for example through required qualifications or apprenticeships — the union can reduce the number of workers available. With the supply of labour reduced while demand stays the same, the wage rises. How effective these methods are depends on how essential and hard to replace the workers are, and on how profitable the firm is. So unions raise wages mainly through collective bargaining and by limiting the supply of labour.
Examiner tip
6-mark 'Analyse': develop two methods (collective bargaining + strike threat; restricting labour supply → wage rises), each as a chain. Linking restricted supply to the labour market (supply down → wage up) is the analytical core (3.4.2).
Question
Discuss whether or not trade unions are good for an economy. (8 marks)
Step-by-step solution
Step 1
Level-marked evaluation. Argue the benefits of unions, then the drawbacks, then judge.
Step 2
Benefits. Secure better pay, hours and safer conditions for workers; protect workers from exploitation; higher wages can raise spending and motivation; give workers a collective voice.
Step 3
Drawbacks. Higher wages can raise firms' costs → higher prices (cost-push inflation) and possible unemployment if workers are priced out; strikes disrupt production and output; can reduce firms' competitiveness.
Step 4
Judgement. Unions benefit workers and can help the economy through better pay/conditions, but excessive demands can raise costs and cause unemployment — depends on how reasonably they act.
Answer
Trade unions bring benefits and costs to an economy, so they are not simply good or bad. Benefits: unions use collective bargaining to win better pay, shorter hours and safer working conditions, and they protect workers from exploitation by powerful employers; higher wages can raise workers' spending (boosting demand) and improve motivation and productivity; and unions give workers a collective voice. Drawbacks: if unions push wages above what firms can afford, this raises firms' costs, which may be passed on as higher prices (cost-push inflation) and can price some workers out of jobs, causing unemployment; strikes disrupt production, reducing output and harming the firm and its customers; and high labour costs can make a country's firms less competitive internationally. Judgement: trade unions are good for the economy when they act reasonably — improving pay and conditions and protecting workers without demanding more than firms can afford. But they can be harmful if they push wages too high or strike frequently, causing unemployment, inflation and lost output. So whether unions are good for the economy depends on how moderately they behave and on the strength of the firms involved — making it impossible to say they are simply good or bad.
Examiner tip
Level 3 (6–8): worker benefits (pay, conditions, protection) weighed against costs (cost-push inflation, unemployment, strikes/lost output), with a 'depends on how reasonably unions act' judgement. Considering workers, firms and the economy (3.4.3) gives a balanced answer.
Question
Discuss whether or not the central bank is the most important financial institution in an economy. (8 marks)
Step-by-step solution
Step 1
Level-marked evaluation. Argue why the central bank is crucial, why other institutions matter too, then judge.
Step 2
Why the central bank is important. Controls monetary policy (interest rates, money supply) affecting inflation and growth; issues currency; lender of last resort to keep the banking system stable; banker to the government.
Step 3
Why commercial banks matter too. They handle everyday saving, lending and payments for households and firms; without them, the central bank's policies could not reach the economy; they fund investment and growth directly.
Step 4
Judgement. The central bank is uniquely powerful (controls the whole system), but commercial banks do the day-to-day work — both are essential; importance depends on the role considered.
Answer
The central bank is extremely important, but whether it is the single most important financial institution is debatable. Why the central bank is crucial: it controls monetary policy — setting interest rates and influencing the money supply — which affects inflation, borrowing, spending and economic growth across the whole economy; it issues the currency, acts as lender of last resort to keep the banking system stable in a crisis, and is the government's banker. No other institution has this system-wide power. Why commercial banks matter as much: commercial banks do the everyday work of the financial system — they accept savings, lend to households and firms, and run the payments system (cards, transfers). Without them, the central bank's decisions could not reach ordinary people and businesses, and the investment and lending that drive growth would not happen. Judgement: the central bank is arguably the most powerful institution because it controls and stabilises the whole financial system, so in that sense it is the most important. But commercial banks carry out the day-to-day saving, lending and payments the economy depends on, so the two are interdependent and both essential. Which is 'most important' therefore depends on whether you mean control of the system (central bank) or everyday financial activity (commercial banks) — so the central bank is uniquely important, but not the only essential institution.
Examiner tip
Level 3 (6–8): the central bank's system-wide powers (monetary policy, lender of last resort) weighed against the everyday role of commercial banks (saving, lending, payments), with an 'interdependent / depends on the role' judgement. Recognising that central-bank policy works THROUGH commercial banks is a strong point.
High-scoring sample answers for money, banking_trade unions on the Cambridge IGCSE 0455 paper, with examiner-style notes mapping each response to the mark scheme and assessment objectives.
Define what is meant by a 'trade union'. (2 marks)
Model answer
A trade union is an organisation of workers (1) that acts together to negotiate with employers on behalf of its members over pay, working hours and conditions, and to protect their interests (1).
Why this scores
One mark for 'organisation/group of workers', one for the purpose (negotiate with employers / protect members). Collective action is the key idea.
Explain two functions of a central bank. (4 marks)
Model answer
Function 1 — controlling monetary policy (1 + 1). The central bank sets interest rates and influences the money supply (1) to manage inflation and the level of demand in the economy (1). Function 2 — acting as lender of last resort (1 + 1). It lends to commercial banks in difficulty (1), which keeps the banking system stable and prevents banks from collapsing in a crisis (1).
Why this scores
Two functions identified + explained. Other valid: issuing the currency, acting as the government's banker, regulating banks. Keep the central bank (controls policy) distinct from commercial banks (serve the public).
Analyse two ways in which commercial banks are important to households and firms. (6 marks)
Model answer
Commercial banks are important to households and firms in several ways. First, they provide a safe place to save and earn interest. Households and firms can deposit their money safely rather than holding cash, and they earn interest on savings, which encourages saving and helps them build up funds for the future. Second, they provide loans. Banks lend money to households — for example mortgages to buy homes — and to firms — for example to buy equipment or expand. This lending lets households make large purchases they could not afford from current income, and lets firms invest and grow, creating jobs. Banks also run the payments system (debit cards, transfers, online banking), making it easy and safe to pay for goods and services. So by offering safe saving, providing loans and handling payments, commercial banks are essential to the everyday financial life of households and firms.
Why this scores
6-mark 'Analyse': develop two services (safe saving with interest; loans for purchases/investment), each carried to a benefit for households and firms, with payments as a supporting point. The loans-fund-investment chain is the strongest.
Analyse the possible disadvantages of trade union activity for firms and the economy. (6 marks)
Model answer
Trade union activity can have disadvantages for firms and the economy. First, higher costs and prices. If a union wins higher wages for its members, the firm's labour costs rise. The firm may pass these costs on to consumers as higher prices, contributing to cost-push inflation, especially in labour-intensive industries; higher costs can also make the firm less competitive against foreign rivals. Second, unemployment. If wages are pushed above the level firms can afford, firms may employ fewer workers — replacing them with machines or cutting jobs — so some workers are priced out of work, raising unemployment. Third, lost output from strikes. If negotiations fail, unions may call strikes, which stop production, reducing the firm's output and revenue and disrupting its customers and suppliers. So union activity, while it benefits members, can raise costs and prices, cause unemployment and reduce output — which is why its effects on firms and the economy must be weighed against the benefits to workers.
Why this scores
6-mark 'Analyse': develop the disadvantages (higher wages → higher costs/prices/lower competitiveness; wages above market level → unemployment; strikes → lost output), each as a chain. Considering firms AND the wider economy (3.4.3) gives breadth.
Discuss whether or not a worker should join a trade union. (8 marks)
Model answer
Joining a trade union has benefits and drawbacks for a worker. Why a worker should join: through collective bargaining, the union has far more power than an individual to win higher wages, better working conditions and shorter hours; it protects the worker if they face unfair dismissal or unsafe conditions, giving them legal support and a stronger voice; and there is strength in numbers when dealing with a powerful employer. Why a worker might not: union membership costs a subscription fee; if the union calls a strike, the worker may lose pay while not working and risk damaging relations with the employer; if union demands push wages too high, the worker could even lose their job; and some workers can negotiate well on their own, especially if they are highly skilled and in demand. There may also be 'free-rider' benefits — non-members sometimes still get the pay rises the union wins. Judgement: whether a worker should join depends on their situation. For a worker with little individual bargaining power, in a large firm or a risky job, joining a union is likely worthwhile for the protection and the higher pay it can win. But for a highly skilled worker in strong demand who can negotiate well alone, the cost and strike risks may outweigh the benefits. So joining a union is beneficial for most ordinary workers, but not automatically the best choice for everyone.
Why this scores
Level 3 (6–8): collective bargaining power and protection weighed against fees, strike risks and the free-rider issue, with a 'depends on the worker's bargaining power' judgement. Recognising that skilled workers may negotiate well alone is the discriminator.
Discuss whether or not a strong banking system is essential for economic growth. (8 marks)
Model answer
A strong banking system supports growth, but whether it is strictly essential is debatable. Why it is important for growth: banks channel savings into loans, so households can borrow and firms can invest in machinery, factories and new products — this investment raises output and productivity, driving economic growth and creating jobs; banks also provide a safe, efficient payments system that lets trade flow; and a stable banking system gives people confidence to save and spend. A banking crisis, by contrast, can cut off lending and cause a deep recession. Why it might not be the only thing that matters: growth also depends on many other factors — the quantity and quality of resources (education, technology), government policy, political stability, and demand; a country could have banks but still grow slowly if it lacks skills, infrastructure or stability. Some firms also fund investment from retained profit rather than bank loans. Judgement: a strong banking system is very important and arguably essential for sustained growth, because it provides the investment finance and stability that growth depends on, and banking crises severely damage economies. But it is not sufficient on its own — growth also needs good resources, sound policy and stability. So a strong banking system is a necessary foundation for growth but must be combined with other factors, meaning it is essential but not the only requirement.
Why this scores
Level 3 (6–8): banks' role in channelling savings into investment (driving growth) weighed against other growth factors (resources, policy, stability) and the existence of other finance sources, with a 'necessary but not sufficient' judgement. Noting that banking crises harm growth strengthens the 'essential' side.
Definitions to memorise and the exact keywords mark schemes credit for money, banking_trade unions answers — sharpened from recent examiner reports for the 2026 0455 sitting.
Anything generally accepted in payment for goods and services. Performs the four functions: medium of exchange, unit of account, store of value, standard of deferred payment.
A profit-making bank that accepts deposits from the public, makes loans, and provides payment services. e.g., Barclays, HSBC, Bank of America.
A government-owned bank that controls monetary policy, issues currency, and acts as lender of last resort. e.g., Bank of England, Federal Reserve.
An organisation of workers that negotiates with employers on behalf of its members.
Negotiation between a trade union (representing many workers) and an employer over pay and conditions.
A collective work stoppage by union members to put pressure on the employer during negotiations.
The traps other students keep falling into on money, banking_trade unions questions — taken from recent Cambridge IGCSE 0455 examiner reports and mark schemes — and how to avoid them.
Why it happens
Everyday usage focuses on coins and notes.
How to avoid it
Money is anything generally accepted in payment — including bank deposits, electronic transfers, increasingly digital currencies. The core idea is GENERAL ACCEPTANCE, not physical form.
0455 Examiner Reports 2022-2024
Why it happens
Both are 'banks'.
How to avoid it
Commercial = profit-seeking, takes deposits from public, makes loans (Barclays, HSBC). Central = government-owned, controls monetary policy, issues currency (Bank of England, Fed). Different roles entirely.
Why it happens
Pay is the most-discussed.
How to avoid it
Trade unions negotiate pay AND conditions (hours, safety, holidays) AND job security. All four are union priorities.
Why it happens
One-sided framing.
How to avoid it
Mark schemes for evaluation expect BOTH advantages (better pay/conditions/protection for workers) AND disadvantages (potential unemployment, cost-push inflation, strikes disrupting output). Balance the answer.
The things students keep getting wrong in this sub-topic, answered.