2.8 The role of money and financial markets Flashcards
• explain the role of money as a medium of exchange • explain the role of the financial sector for the economy, including financial institutions such as banks, building societies and insurance companies • evaluate the importance of the financial sector for consumers, producers and government • analyse how different interest rates affect the levels of saving, borrowing and investment • calculate the effect on savings and borrowings of changes in the rate of interest. (18 cards)
What does the term ‘money’ mean?
Anything that is generally accepted as a means of payment for goods and services.
What are ‘debit cards’?
Takes money directly from your current account and transfers it to the seller
What are ‘credit cards’?
Enables you to buy goods whether or not you have the money in your account and pay it back later.
What does the term ‘medium of exchange’ mean?
Anything that sets the standard of value of goods and services acceptable to all parties involved in a transaction.
What is the ‘financial sector’?
Consists of financial organisations and their products, and involves the flow of capital.
What are the roles of the central bank (Bank of England)?
- To issue banknotes
- To control monetary policy
- To provide financial stability
- To manage the country’s foreign reserves
- To act as the bank for commercial banks
- To act as the bank for the government
What are the roles of ‘commercial banks’?
- Accept deposits and pay interest on them
- Make payments on behalf of the customers
- Issue loans to producers and provide overdraft facilities
- Offer safe deposit boxes for very expensive items
What does the term ‘rate of interest/interest rate’ mean?
The cost of borrowing money, e.g. that which is paid to the lender. It is also the reward for saving
What does the term ‘investment’ mean?
The purchase of capital goods that are used to produce future goods and services. It is also an asset purchased to provide an income in the future and/or to be sold at a profit
What does the term ‘building society’ mean?
A mutual financial organisation that is owned by its members. Its primary objectives are to receive deposits from its members and to lend money for members to purchase property
What does the term ‘mortgage’ mean?
An agreement with financial institutions to borrow money to purchase a property
What does the term ‘insurance companies’ mean?
Financial institution that guarantees compensation for specified loss, damage, illness or death in return for an agreed premium.
What does the term ‘saving(s)’ mean?
The part of a person’s (disposable) income which is not spent on consumption. Savings are done by savers.
What does the term ‘borrowing’ mean?
To receive money from another party with the agreement that the money will be repaid.
How does interest rate affect the level of saving?
A rise in interest rates will encourage people to increase their level of saving because the reward of saving is greater. A fall in interest rates will discourage people to increase their level of saving because the reward of saving is lesser.
How does interest rate affect the level of borrowing?
Higher interest rates increase the cost of borrowing and so levels of borrowing decrease. Lower interest rates decrease the cost of borrowing and so levels of borrowing increase.
How does interest rate affect the level of investment?
The level of investment is inversely related to the rate of interest but this can depend on the confidence in the economy.
What is the importance of the financial sector to the economic groups?
- Credit provision
- Liquidity provision
- Risk management
