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macroeconomics > 1.4 financial markets and monetary policy > Flashcards

1.4 financial markets and monetary policy Flashcards

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1
Q

Bank of England

A

central bank in the uk economy which is in control of monetary policy

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2
Q

bond

A

debt; represents money that must be paid back over a period of time

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3
Q

broad money

A

money held in banks and building societies but that is not immediately accessible

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4
Q

central bank

A

controls the banking system and manages the government’s monetary policies

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5
Q

contractionary monetary polcy

A

monetary policy implemented to decrease aggregate demand

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6
Q

default

A

the failure or inability to meet the legal minimum requirements of a loan

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7
Q

equation of exchange

A

the stock of money in an economy multiplied by the velocity of circulation equals the price level multiplied by real output (MV=PQ)

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7
Q

dividend

A

portion of firms’ profits paid to shareholders

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7
Q

expansionary monetary policy

A

monetary policy implemented to increase aggregate demand

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8
Q

financial sector

A

firms that provide financial services

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9
Q

hot money

A

highly volatile money derived from investors storing money in different institutions, looking for the highest rate of return

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10
Q

interest

A

money paid to a lender by a borrower

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11
Q

monetary policy committee (MPC)

A

nine economists who meet monthly to set the bank rate as well as other monetary instruments

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12
Q

monetary policy

A

use of interest rates and other monetary instruments to achieve macroeconomic objectives

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13
Q

money supply

A

stock of money in the economy, comprised of cash and bank deposits

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14
Q

narrow money

A

physical money and more liquid assets

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15
Q

quantitative easing (QE)

A

by buying assets (generally government bonds) using newly created electronic money

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16
Q

rate of interest

A

the reward for saving and the cost of borrowing

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17
Q

repo rate

A

rate at which the central bank can lend money to commercial banks

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18
Q

reserve currency

A

foreign currency held in a country’s official reserves due to its value as a medium of exchange

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19
Q

reverse repo rate

A

rate at which the central bank can borrow money from commercial banks

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20
Q

shadow banking systen

A

unregulated firms that provide credit

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21
Q

sharw

A

equity; represents entitlement to a portion of a firm’s profits via dividends

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22
Q

systemic risk

A

when issues within one firm in the financial sector could bring about the collapse of the sector and/or the economy

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23
transmission mechanism of monetary policy
the process by which alterations to the base rate affect determinants of aggregate demand
24
money
anything that can be used as a medium of exchange for goods and services
25
5 main functions of money
medium of exchange unit of account store of value facilitates exchange standard of deferred payment
26
how is money a medium of exchange?
serves as a standard unit of account that facilitates transactions by allowing goods and services to be exchanged for a common and widely accepted medium of exchange
27
how is money a unit of account?
serves as a standard unit of measurement for the value of goods, services and financial assets which enables individuals and businesses to compare prices and make informed decisions
28
how is money a store of value?
money allows individuals to save for future consumption by maintaining its purchasing power over time
29
how does money facilitate exchange?
by reducing the transaction costs and increasing the efficiency of exchanging goods and services money helps to promote economic activity and growth
30
how is money a standard of deferred payment?
enables individuals and businesses to make deferred payments, such as loans and mortgages by providing a means of transferrable credit
31
6 characteristics of money
durable portable scarce uniform divisible acceptable
32
yield
the interest received on a bond
33
payoff
the amount that the bondholder receives each year in interest from the government
34
assets
money the bank has cash and everything else that will make the bank money in the future e.g. loans and cash
35
liabilities
money the bank owes deposits if you want to withdraw, the bank has to give it to you
36
financial market
one where buyers and sellers exchange financial assets (securities) such as shares (equities), currency or bonds
37
what trade-off does the bank face?
an increase in lending will increase profit but means customers are less able to access their deposits an increase in lending will increase the amount of profit the bank can make they make profit from lending by charging interest on the loans however, increasing lending means they have less cash they may not be able to give money to a customer who asks to take out some of the cash they have deposited in the bank
38
liquidity
how much cash a bank has lending out more money means a bank will make more profit but it will have less liquidity
39
high capital ratio
when there is more capital compared to loans this is good, can fall back on capital if bank is running low on cash then can fall back on owner's money
40
money supply
total supply of money in the economy
41
narrow money
cash and credit and debit card accounts ready to be spent immediately
42
broad money
narrow money and money in savings accounts, cheques and bonds harder to access and can't be spent immediately
43
money market
where you can buy and sell short-term financial assets e.g. overdrafts
44
capital market
where you can buy and sell long-term financial assets
45
foreign market
where you can buy and sell foreign currency like the american dollar the amount paid for goods and traded in this market is given by the exchange rate
46
equity
percentage of a company owned
47
main advantage of selling shares
money raised does not need to be paid back the investor purchasing the shares takes on all the risk - if company fails they will lose their money
48
disadvantage of selling shares
owner of the company loses a share in the company which means they will lose a share of all future profits as these need to be paid to the shareholders
49
maturity
when the final interest on a bond must be paid
50
coupon rate
annual interest rate received on a bond
51
the difference between the coupon rate of a bond and its payoff
coupon rate shows the actual amount of interest paid by the government as a percentage of the original bond price whereas the payoff shows the actual amount interest paid by the government
52
difference between bond yield and the coupon rate
bond yield is the interest rate based on the current price of the bond and the coupon rate is the interest rate based on the original price of the bond
53
when is quantitative easing used?
when the base interest rate is close to 0
54
how does quantitative easing work?
Bank of England electronically creates new money Central bank uses new money to buy financial assets such as government bonds from highstreet banks highstreet banks receive money which increases their money supply so they have more money to lend out lend out to consumers, increasing consumption lend to firms who invest
55
real life example of QE
Bank of England's monetary policy committee pursued this in 2009 to 2012 they created £375bn new pounds and used it to purchase assets from highstreet banks this meant highstreet banks could lend out more, higher money supply decreased the exchange rate in 2009 the UK base interest rate was close to 0 AS wasn't increasing enough to get out of recession
55
fischer's equation
MV=PQ M= money supply V= money supply P=price level Q=quantity of goods/services
56
what variables remain constant in the Fischer equation?
V and Q
57
what does the quantity theory of money predict?
that quantitative easing will lead to an increase in price level which is inflation
58
how to evaluate quantitative easing
reference quantity theory of money write out MV=PQ quantitative easing, increases money supply, increases general price level leads to inflation
59
what form of monetary policy is QE?
expansionary monetary policy
60
quantitative easing
when the central bank buys financial assets such as bonds from highstreet banks this increases the amount of money that these banks can lend more consumers and firms will be able to borrow increasing consumption and increasing investment increasing AD and real GDP increased money supply leads to an increase in the supply of pounds this causes a depreciation this increases net exports and pushes out AD
61
negative consequence of QE
a high QE round can cause hyperinflation hyperinflation can outweigh increase in real GDP

macroeconomics (6 decks)

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