Chapter 12

Question 1

Define asset

Answer 1

Things people own

Question 2

Define liability

Answer 2

Things people owe

Question 3

Define money (2 definitions)

Answer 3

• Exchange(payment)

- Store of wealth

Question 4

The way in which money developed

Answer 4

• Bartering
• Commodity (shells, beads etc)
• Representative (Banknotes backed by gold)
• Token money (cash physical or deposits)

Question 5

Define money supply

Answer 5

Stock of financial assets which function as money

Question 6

Two types of money supply

Answer 6

Narrow money : cash and liquid money

Broad money : cash and liquid and illiquid assets

Question 7

Define liquidity (money)

Answer 7

Ease of which an asset can be converted into cash without loss of value

Question 8

Define equity and debt

Answer 8

Equity: assets people own
Debt: people’s liabilities

Question 9

Define share

Answer 9

Part of a company, initially sold by a company to raise financial capital

Question 10

Define bond

Answer 10

Financial securities sold by companies or governments, with maturity dates (from when they are redeemed) with a fixed interest pay each year until the bonds mature

Question 11

What is a financial market

Answer 11

Markets in which financial assets or securities are traded

Question 12

Why is a security called a security

Answer 12

Because it secures a claim against someone or an institution

Question 13

Three types of financial markets

Answer 13

Money markets- short term financial needs
Capital markets- long terms selling shares and bored to raise long term financing
Foreign exchange market- global market for trading currencies

Question 14

Difference between a corporate and government bond

Answer 14

Corporate- debt securities issued by company and sold as new issues to people who lend long term to company
Gov- debt securities issued by gov and sold as new issues to people who lend long term to gov

Question 15

What is debt security known as in the UK

Answer 15

Gilt edged securities or gilt

Question 16

Why is there an inverse relationship with interest rates and bond prices

Answer 16

Because price of bond rises the bonds yield falls)

Question 17

Define maturity date

Answer 17

The date at which the issuer of dated security pays the face value

Question 18

Two kinds of capital markets

Answer 18

New issues

Second hand market (London stock exchange)

Question 19

Define commercial bank

Answer 19

Retail bank which aims to make profits by selling banking services to its customers

• Accepts deposits from public
• Create deposits lend to customers

Question 20

Define Investment bank

Answer 20

Work with companies, help companies buy other companies

Question 21

What is the issue regarding systematic risk with investment banks

Answer 21

Risk of breakdown of the entire financial system due to interlinkages

Question 22

How monopoly banks create credit

Answer 22

10% of people’s deposits are backed up with cash

• Only one bank
• Possesses only one reserve of cash

Question 23

How multi banking systems create credit

Answer 23

If banks are willing to exchange between each other more is able to be created

Question 24

What is the liquidity profitability trade off

Answer 24

Profits are traded off as there must be a liquid reserve

Question 25

Banks must provide secured loans because…

Answer 25

People may default so bank loses money

Question 26

Define central bank

Answer 26

National bank providing financial and banking services for its country’s government and banking system

Question 27

What are the two main functions of the bank of england

Answer 27

- Help gov maintain macroeconomic stability | - bring about financial stability

Question 28

Financial stability can be achieved how through the central bank

Answer 28

- Lender of last resort to banking system | - Controlling note issue

Question 29

Difference between policy objective and policy instrument

Answer 29

Objective- target that BoE aims to hit | Instrument- tool of control to achieve this

Question 30

What is the MPC

Answer 30

Part of BoE implements UK monetary policy

Question 31

What is the bank rate

Answer 31

Rate of interest the bank of england pays to commercial banks on their deposits held at the bank of england

Question 32

Define contractionary monetary policy

Answer 32

Interest rates increased to decrease demand in the economy

Question 33

Why does an increase in interest rates decrease aggregate demand

Answer 33

- Less consumption , borrowers also have less money to spending - Reduction in business investment (capital is unprofitable) - High interest rates, cause higher demand for pound so exchange rate rises and exports from UK less price competitive. AD decreases - Low interest rate, less demand AD increases

Question 34

Define expansionary monetary policy

Answer 34

Lower interest rates to increase AD

Question 35

Draw reduction interest rates effect on AD

Answer 35

…

Question 36

What does a change in bank rate ultimately cause

Answer 36

Inflation

Question 37

What happens if bank rate falls

Answer 37

Asset prices rise and people feel wealthier and more confident about the future

Question 38

What is the time lag between bank rate change and inflation

Answer 38

2 years

Question 39

Describe quantitative easing

Answer 39

Bank of england buys assets usually gov bonds, with money that the Bank has created electronically. Hope of selling these bonds to BoE and lend the newly created money to individuals

Question 40

What is forward guidance

Answer 40

Sending signals to financial markets, business and individuals about the BoE interest rate policy before it occurs so no shocks

Question 41

What happens with a falling exchange rate

Answer 41

Increases prices of imported goods, increasing rate of inflation. Cost push inflation Demand pull inflation

Question 42

Define regulation

Answer 42

Imposing rules and laws on limiting freedom of individuals

Question 43

Define financial regulation

Answer 43

Limiting freedom of banks and other financial institutions

Question 44

What does the financial policy committee do

Answer 44

Identifying monitoring and taking action of systemic risks

Question 45

What does the prudential regulation authority do

Answer 45

Regulation and supervision of banks, building and societies

Question 46

What does the financial conduct authority do

Answer 46

Makes sure financial markets work well so consumers get a fair deal

Question 47

Equation of a banks capital

Answer 47

Assets- liabilities

Question 48

What is a moral hazard

Answer 48

Tendency of individuals and firms, once protected to act against some contingency

Question 49

What is the liquidity and capital ratio

Answer 49

Liquidity/ ratio of banks cash and other liquid deposits Capital/ amount of capital on a banks balance sheet as a proportion of its loans a.