Financial Markets

Question 1

Money Supply

Answer 1

The total supply of money in the economy
Divided into two :
- Narrow Money
- Broad Money

Question 2

Narrow Money

Answer 2

Money that is ready to spend immediately .
e.g cash, money in debit/credit cards

Question 3

Broad Money

Answer 3

Money that is harder to access and can’t be spent immediately.
INCLUDES ALL NARROW MONEY AS WELL
e.g money tied up in saving accounts, cheques, government bonds

Question 4

Types of Financial Markets

Answer 4

1- Money Market
2- Capital Market
3- Foreign Exchange Market

Question 5

Money Market

Answer 5

Where you can buy and sell short-term financial assets.

e.g short term loans and overdrafts
IOUS < 1 year

Question 6

Capital Market

Answer 6

Where you can buy and sell long-term financial assets.

e.g large business loans ( Apple looking to expand - £3mil loan )
IOUs > 1 year

Question 7

Foreign Exchange Market

Answer 7

Where you can buy and sell foreign currencies.

e.g US dollars

Question 8

Two ways to raise money for business to get big

Answer 8

• Debt
• Equity

Question 9

Debt

Answer 9

Borrowing money from a bank or issuing corporate bonds.
When a company takes on debt it MUST pay it back.

Question 10

Equity

Answer 10

By selling a percentage of the company to investors using shares.
Investors gets a percentage of companies future profits.

Question 11

Maturity

Answer 11

When the final interest on a bond must be paid

e.g maturity of 5 years - gov must pay bond holder final interest payment on the bond in 5 years

Question 12

Coupon Rate

Answer 12

Annual interest rate received on a bond.

e.g. yearly interest 1% —> coupon rate 1%
biannual interest 4% —> coupon rate 2%

Question 13

Yield

Answer 13

Interest received on a bond

e.g. interest rate 5% —> yield 5%

Question 14

Commercial Bank

Answer 14

Facilitate everyday transactions such as putting money in savings accounts, taking out mortgages and taking out cash

E.g Natwest , Barclays , Halifax

Question 15

Investment Bank

Answer 15

Make investments to make money

E.g Goldman Sachs

Question 16

Liquidity

Answer 16

How much cash a commercial bank has
How easy it is to turn assets into cash

Question 17

Liquidity Ratio

Answer 17

Liquid Assets ( cash) /Deposits

Higher ratio = More liquid and more cash available to repay customers who have deposited money at the bank

Question 18

Profit-Liquidity Tradeoff

Answer 18

By trying to increase profitability and giving out more loans , commercial banks therefore decrease their liquidity and ability to give back money to consumers which can have negative consequences

Question 19

Capital Ratio

Answer 19

Measures how much capital a bank has compared to it’s loans it’s lent out

Question 20

Capital ( IN BANKING )

Answer 20

Money in the bank from the owners of the bank

Question 21

Conventional Monetary Policy

Answer 21

Manipulating interest rates

Question 22

Unconventional Monetary Policy

Answer 22

Quantitative Easing
Forward Guidance
Funding for Lending

Question 23

Quantitative Easing

Question 24

Forward Guidance

Answer 24

To prevent confidence draining out of the market

Limited by lack of credibility e.g BoE didn’t increase IR when unemployment rates hit 7%

Question 25

Funding for Lending

Answer 25

Pot of £70 billion
Aim to increase lending, investment and consumption by allowing commercial banks to borrow money at 0.25% ( lower than base rate of 0.5% ) lending it directly to businesses

BUT small compared to £4.1 trillion that was lost in financial crisis

Question 26

Types of Financial Market Failure

Answer 26

1) Asymmetric information
2) Speculation and Market bubbles