Chapter 12

Question 1

Function of money

Answer 1

A benefit generated by the use of money

Question 2

What do the functions of money include

Answer 2

Medium of exchange

Unit of account

Store of value

Standard of deferred payment

Question 3

Medium of exchange

Answer 3

People’s output can be exchanged for money

Question 4

Unit of account

Answer 4

Enables comparison of prices and values of different products

(If inflation remains low)

Question 5

Store of value

Answer 5

Money can be stored until needed and doesn’t have to be spent immediately

(Inflation erodes this function)

Question 6

Standard of deferred payment

Answer 6

Money can be used now or in the future

Question 7

Characteristics of money

Answer 7

Accepted by population

Durable (must last and not deteriorate)

Portable (must be transportable)

Divisible (capable of being divided into units of measurement)

Scarce (limited supply)

Difficult to forge (won’t be scared if easily reproduced)

Question 8

Money supply

Answer 8

The value of the stock of money that exists within an economy at a point in time

Question 9

The money supply

Answer 9

Notes and coins

Bank accounts

Other financial assets
(Narrow + broad money)

Question 10

Narrow money

Answer 10

A measure of the money supply that includes balances that can be used immediately as a medium of exchange

(Notes and coins)

Question 11

Broad money

Answer 11

A measure of the money supply that includes notes and coins as well as most balances help by banks and other financial institutions
(Deposits)

Question 12

Financial market

Answer 12

Markets that enable transfers between those who wish to deposit funds and those looking to borrow funds

Question 13

Money market

Answer 13

The market that deals in short term finance between firms, individuals and governments (focusing on debts due to be repaid in the near future)

Question 14

Treasury bill

Answer 14

A very short term form of borrowing by the government usually repaid within 3 months

Question 15

Capital market

Answer 15

The market which deals with medium term and long term finance (shares and bonds) between individuals, firms and governments (focusing on debts due due for repayment in more than a few months)

Question 16

Bonds

Answer 16

A form of borrowing giving the holder a fixed rate of interest and the money is repaid within a set period of time - bonds can be traded

Question 17

Shares

Answer 17

Issued by firms raising finance giving the holder the chance to receive dividends out of the firm’s profits and often allowing the holder to vote in company affairs. Can he traded and are not repaid by the firm.

Question 18

Foreign exchange market

Answer 18

The market that deals with transactions requiring conversion from one currency into another currency

Question 19

Spot market

Answer 19

The immediate conversion of one currency into another at the current market exchange rate

Question 20

Forward market

Answer 20

The agreement to buy foreign currency at an agreed exchange rate at some specified date in the future

Question 21

The role of financial markets

Answer 21

The money market

The capital market

The foreign exchange market

Question 22

Debentures

Answer 22

Another name for bonds, usually issued by companies (corporate bonds)

Question 23

Equity

Answer 23

The value of share capital issued by firms as part of their financial capital

Question 24

Coupon

Answer 24

The fixed interest on a bond

Question 25

Maturity date

Answer 25

The date of repayment for a bond

Question 26

Relationship between interest and bond price

Answer 26

Increase in prices leads to decrease in bond price

Question 27

commercial bank

Answer 27

A bank that accepts deposit is from and lends money to the general public (Usually for personal and business loans)

Question 29

Investment bank

Answer 29

A bank that provides financial services to other businesses, such as arranging share or debenture issues

Question 30

What potentially contributed to the financial crisis of 2007-08

Answer 30

Banks carrying out both commercial bank and investment bank

Question 31

Functions of a commercial bank

Answer 31

Accepting deposits Lending to economic agents Providing an efficient means of payment (card and bank transfers)

Question 32

Balance sheet

Answer 32

A financial statement showing the assets of an organisation alongside how those resources were financed Must always balance

Question 33

Assets examples

Answer 33

Notes and coins Balances held at BOE Money at call and short notice Bills (commercial and treasury) Investments Advances Tangible non current assets

Question 34

Liabilities example

Answer 34

Share capital Reserved (retained profits) Long term borrowing Short term borrowing Deposits

Question 35

Liquidity

Answer 35

Refers to how easily an asset can be converted into cash without any loss in value

Question 36

Objectives of a commercial bank

Answer 36

Liquidity (ensure they have sufficient notes and coins) Profitability (lending money out and charging interest) Security (greater profits is made on riskier lending)

Question 37

Fractional banking

Answer 37

The ability of banks to hold a fraction of their customers deposits at any time, thus allowing them to lend out money and earn interest

Question 38

Central bank

Answer 38

The bank of an economy responsible for the issue of money and management of monetary policy for that currency

Question 39

Functions of a central bank

Answer 39

Financial stability Macroeconomic stability

Question 40

Monetary policy

Answer 40

The manipulation of the price and availability of money within an economy to achieve economic policy objectives