Booklet 4 - Macro Flashcards by Jasmine Gale

Definition - Barter

trading one good or service for another

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Definition - commodity money

Commodities had an intrinsic value of their own but don’t require a double coincidence

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Definition - representative money

Backed by gold held in a bank but may be represented by something else for security or portability

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Definition - token money

Money bears no relation to anything of any intrinsic value, can no longer be exchanged for precious metal

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Definition - narrow money

Money that can be used as a medium for exchange

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Definition - broad money

Includes everything in narrow money but also assets that serve as stores of value but are too illiquid to serve as a medium of exchange

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Definition - sight deposit

Money deposited with a financial institution that can be withdrawn at any time with no penalty

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Definition - time deposits

Money deposited with a financial institution that can only be withdrawn after a certain notice period or from which withdrawal incur a penalty

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Definition - liquidity

The ease with which an asset can be converted into cash without loss of value

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Definition - asset

A thing someone owns which has a market value and can generate an income

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Definition - liability

Something that is owed

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characteristics of a money market

provides short term borrowing
matures in less than a year
e.g. treasury and commercial bills
promotes liquidity

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Characteristics of a capital market

trading in shares and bonds
medium to long term borrowing

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Definition - primary markets

For new issues or bonds newly issued by the government

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Definition - secondary markets

Bonds and shares are resold second hand

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Characteristics of a foreign exchange market

trade in foreign currencies
biggest financial market

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Definition - spot markets

The exchange takes place immediately

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Definition - forward markets

Exchange takes place in a time in the future

Definition - bills

Short term loans raised by the government (treasury) or firms (commercial)
- no interest
- sold at discount and redeemed at parity (what they are worth)

Definition - bonds / gilt

A form of long term borrowing with guaranteed annual interest
- either be corporate (firms) or government bond (gilt)

Yield calculation

Annual coupon divided current market price times by 100

Definition - central banks

A bank that acts as a national bank and provides services to the government and the banking system
- Bank of England

Definition - commercial banks

A financial institution which aims to make a profit by selling banking services to its customers
- NatWest

Definition - investment banks

A bank which doesn’t accept deposits from the public and offers advice and consultancy to help with stock market flotations
- JP Morgan

Objectives of a commercial bank

- profitability - liquidity - security - loans are secured against property

Definition - reserve requirement

Minimum proportion of deposits banks need to keep as cash - 10%

Money multiplier calculation

1 over reserve requirement

Functions of the central bank

- help the give maintain macroeconomic stability - bring about financial stability in the monetary system - lender of last resort - controlling the issue of notes - acting as the bankers bank - acting as the government bank

Definition - helicopter money

Giving money directly to citizens

Definition - forward guidance

An attempt to send signals to financial markets about the furture direction of conventional monetary policy to reduce uncertainty and can get the effect of interest rates sooner

Definition - quantitive easing

With permission from the treasury the Bank of England credits its own account with newly created money thus increasing the money supply

Fishers equation of exchange

MV=PQ M - the money supply V - velocity of circulation P - the price level Q - quantity of goods and services sold

Definition - macroprudential

Regulate the overall stability of the financial system and act to remove risk

Definition - microprudential

Regulate the overall stability of the a single financial institution and act to remove risk

Financial policy committee (FPC)

A macroprudential regulator

Prudential regulation authority (PRA)

Supervises individual banks by performing stress tests - Microprudential regulator

Financial conduct authority (FCA)

Make sure financial markets work by promoting competition and protecting consumers - microprudential regulator

Definition - stress test

Looks at an individual bank’s resilience to various adverse scenarios

Definition - run on the bank

A scenario where an unusually large number of people which you withdraw their deposits in response to panic

Definition - moral hazard

When a firm takes in too much risk while knowing that someone else will bear a significant portion of the cost

Definition - systemic risk

There is a risk posed to the whole financial system because of the connections between institutions and markets

Definition - capital ratio

measures how much of a banks funding has come in the form of equity

Definition - liquidity ratio

The ratio between the banks liquid assets and the expected outflows from the bank