financial markets

Question 1

functions of money

Answer 1

medium of exchange–purchase goods and services

store of value–as a means of savings

unit of account–as a way to value goods and services

Question 2

characteristics of money

Answer 2

durability–needs to last
portable
durable
hard to counterfeit

Question 3

m0

Answer 3

notes and coins plus central bank reserves

Question 4

m1

Answer 4

notes and coins deposits held by non bank private sector

Question 5

m2

Answer 5

notes and coins plus all retail deposits that can only be withdrawn with notice

Question 6

money supply

Answer 6

total amount of money in circulation

Question 7

affect money supply

Answer 7

fall in the purchasing of bonds by central bank
less cash to lend
fall in money supply

increase in reserve requirement(comm banks have to save more than 6%)
–increase in percentage of saving
less cash to lend
less money supply

fall in base rate
fall in cob for comm from boe
lloyds increase borrowing from BOE
increase cash to lend

lloyds has less reward for saving
less savings in boe
increase cash to lend
increasse money supply

Question 8

demand for money

Answer 8

willlingness and ability of consumers,firms and govemment to borrow money

Question 9

factors afffecting demand for money

Answer 9

fall in interest rates
increase gdp increase business confidence

inflation anticiapted–boe react by increasing interest rates
increase future cop
borrow now
increase demand for money

inflation antiipated
fall in value of money
real debt falls
borrow now
increase demand for moeny

Question 10

money market

Answer 10

short termfinance typically 24 hrs to 12 monthhs to firms and consumers
this includes interbank lending,purchase of gilts

Question 11

capital market

Answer 11

provides medium to long term finance
companies issues shares of corporate bonds

Question 12

foreign exchange market

Answer 12

market where differeneces are bought and sold
e.g–tourism,speculation and trade
spot market–imeddiate exchange of foreign urrency

Question 13

factors affecting bond prices

Answer 13

increase in interest rates increase savings–fall in demand for bonds
fall in price of bonds

increase in budget defiict–increase sellinggs of bonds–increase supply of bonds
fall in price of bonds

rise in inflation
increase in inflation
boe react by raising interest rates
if irs is greater than bond yeirld
rater save
fall ind emand for bonds

Question 14

quantitative easing

Answer 14

boe creates money–buy bonds from commercial banks
increase in demand for bonds
increase price of bonds

Question 15

explain process through which QE boosts economic growth and reduces unemployment

Answer 15

BOE creates money £895 bn 2008-2021
increase demand for bonds
increase price of bonds
positive wealth effect
increase C
increase AD
increase growth

lloyds have more cash to lend

Question 16

quantitiative easing mena sinterest rates rise over time

Answer 16

quantitativ eeasing will lead to a rise in inflation

Question 17

debt affect individuals commercials banks

Answer 17

increase debt
fall in purchasing power
lwoer c
lower ad
lower growtth

vommercial banks
less money to lend
increase i.r
fall in c
fall ina d
fall in growth

Question 18

inflation and debt

Answer 18

increas einflation fall in real debt

Question 19

deflation

Answer 19

rise in real debt

Question 20

higher nominal interest rates

Answer 20

increase mortgage repayments

Question 21

debt individuals and gov

Answer 21

n Q4 2024 the debt-to-income ratio was 118.1%.
98.1% of GDP (
2.7 trn 2022 feb

Question 22

increase debt

Answer 22

fall in g
incrrease tax rates
for banks:increase .r

increase debt gov sell bonds to firms

Question 23

Central Bank
what do they do
whoa re their customers
how many
who reglates them

Answer 23

–implement monetary policys
oversees the countrys financial system
over see the countrys fianncial system

govs and banks
one

hm treasury

Question 24

PRa regulate

Answer 24

coomercial banks
and investment banks

Question 25

ring-fencing

Answer 25

splitting up retail abnsks from larger investmnet banks protects the essential barts of business from rsikier investments however not cheap to implement--less money to lend

Question 26

costs of ring fencing

Answer 26

£200m for a bank to implemnt ring fencing £120 m per year to maintain iincrease interest rates

Question 27

assets

Answer 27

cccash (notes and loans) investment(bonds and guilts) balances at boe(reserve requirement) fixed assets(banks branches) advances(customers loans and mortgages)

Question 28

liabilities

Answer 28

long term borrowing short term borrowing reserves share capital

Question 29

PRA

Answer 29

Prudental regulation authroirty helps to maintains tability of banks prevents banks collapsing

Question 30

FCA

Answer 30

financial conduct authority micro-prudential regulator helps cusotmers and icnrease confidence

Question 31

Ring fencing argument

Answer 31

FCA can impose ring fencing. This is whereby commercial banks forced to detach from investment banks this regulationw as introduced in 2019,which meant that commercial banks less risk from going bankrupt this means less system risk as commerical banks can facilitate lending thereby increase i (increase mutlipier effect) also leading to acceleratione effect as investment increases further in addition increase in capital stock increase LRAS increase labour productivity and productive potentnial Eval:ring fencing is vey costly in order to adminsitrate it cost 2000 m increase i.r to maintian profit leads to negative multiplier effect

Question 32

Regulate market rigging

Answer 32

prevent banks from colluding and sharing a high fixed interest rate competition increases banks lower i.r in order to attract customers increase demand for houses however depends on likelihood of regulatory capture