Financial Markets And Monetary Policy

Question 1

What are the characteristics of money?

Answer 1

• Divisibility
• Acceptability
• Durability
• Scarcity
• Uniformity
• Portability

Question 2

What are the functions of money?

Answer 2

• A medium of exchange
• A measure of value
• A store of value
• A method of payment

Question 3

What is the money supply?

Answer 3

The stock of financial assets which function as money

Question 4

What is narrow money?

Answer 4

The part of the stock of money (or money supply) made up of cash and liquid bank and building deposits

Question 5

What is broad money?

Answer 5

The part of money (or money supply) made up of cash, other liquid assets such as bank and building security deposits, but also some illiquid assets.
(M4)

Question 6

What is the money market?

Answer 6

Money markets provide a means for lenders and borrowers to satisfy their short term financial needs.

Question 7

What is the capital market?

Answer 7

Where securities such as shares and bonds are issued to raise medium to long term financing, and are traded on the second hand part of the market.
(e.g London stock exchange, New york stock exchange)

Question 8

What is the FOREX market?

Answer 8

Global, decentalised markets for the trading of currencies.

Question 9

What are the roles of financial markets in the wider economy?

Answer 9

They are markets where finacial assers and securites are traded.

Question 10

What is debt?

Answer 10

What an individual, organisation, or government owes to another party

Question 11

What is equity?

In a financial market…

Answer 11

Refers to ownership in a company, typically represented by shares or stocks?

Question 12

Relationship between market interest rates & bond prices?

Answer 12

Market interest rates and bond prices have an inverse relationship.

Question 13

What is a commercial bank?

Answer 13

A financial institution which aims to make profits by selling banking services to its customers.

Question 14

What is an investment bank?

Answer 14

Banks which assist in raising finance for companies, financial insitutions, governments and organisations.

Question 15

What are the main functions of a commerical bank?

Answer 15

• Provide loans to individual consumers and businesses (e.g mortgages)
• Provide safekeeping and returns for deposits/savings

Question 16

What is the structure of a commerical banks balance sheet?

Answer 16

It shows the banks assets and liabilities

Question 17

What are the objectives of a commercial bank?

Question 18

How do banks create credit?

Answer 18

1. Initial deposit. A customer deposits money into the bank.
2. Lending and loan creation. The bank keeps a fraction of the deposit and lends out the remainder to borrowers
3. Deposit expansion. The loaned amount is then received by the borrower who deposits the funds in their own account. The cycle repeats.

Question 19

What are the main functions of a central bank?

Answer 19

• Banker to the government
• Regulate the banking industry
• Monetary policy
• Lender of last resort

Question 20

What are the current objectives of monetary policy set by the government?

Answer 20

To maintain price stability and achaive low and stable inflation
- The government set target is 2%

Question 21

Factors considered by the MPC when setting the bank rate?

Answer 21

• Current inflation rate
• Inflationary/deflationary pressure
• Confidence
• Economic growth
• Employment etc..

Question 22

What is quantative easing?

Answer 22

Involves the Bank of England buying financial assets, usually government bonds or gilts, with new money that the Bank has created electronically. The hope is that the financial institutions (banks, pension funds and insurance companies) which sell the bonds to the Bank of England will then lend the newly created money to businesses and individuals. The latter can then invest and spend more, hopefully increasing growth.

Question 23

What is funding for lending?

Answer 23

Designed to kick start lending by commercial banks to the business and household sector.
1/ Each bank or building society will be able to access £1 of cheap funding for every £20 of outstanding loans to companies and
households it has on its books.
2/ Banks will receive this funding for a fee of 0.25 percentage points a year
3/ As an incentive to increase lending, any bank that increases its net lending will be allowed to access more cheap funding at that cost
4/ Banks that reduce their outstanding lending will have to pay more for the funding, up to 1.5 percentage points
5/ Banks and building societies will be able to borrow up to 5% of their stock of existing lending to the real economy, plus any net expansion of lending during a reference period (from end-June 2012 to end-December 2013)

Question 24

What is forward guidance?

Answer 24

Attemps to send signals to financial markets, businesses and individuals, about the Bank of England’s interest rate policy in the months and years ahead, so that the economic agents are not suprised by a sudden and unecpected change in policy

Question 25

Who regulates the financial system in the UK?

Answer 25

- Financial policy comittee (FPC) - Prudential regulation authority (PRA) - Financial conduct authority (FCA)

Question 26

Why may a bank fail?

Answer 26

- Liquidity risk - Credit risk - Fluctuating IR rates - Systemic risk - Moral hazard

Question 27

What are liquidity ratios?

Answer 27

The ratio of a bank's cash and other liquid assets to its deposits.

Question 28

What are capital ratios?

Answer 28

The amount of capital on a banks balance sheet as a proportion of its loans.

Question 29

What is moral hazard?

Answer 29

The tendency of individuals and firms, once protected against some contingency, to behave so as to make that contingency more likely

Question 30

What is systemic risk?

Answer 30

The risk of the breakdown of the entire financial system, caused by inter-linkages in the finacial system, rather than simply the failure of an individual bank or finacial institution.

Question 31

What is an asset?

Answer 31

A resource that can be sold for money

Question 32

What is a liability?

Answer 32

An amount owed by a business - current (short-term) - non-current (long-term)

Question 33

What is liquidity?

Answer 33

It measures the ease with which each asset can be converted into cash without loss of value.

Question 34

What is a share?

Answer 34

Undated financial assets, sold initially by a company to raise financial capital. A share signifies that the holder owns part of the enterprise. - Shares sold by PLCs are marketable on a stock exchange - Shares sold by Ltds are not marketable

Question 35

What is a bond?

Answer 35

Financial securities sold by companies or governments which are a form of long term borrowing. Bonds usually have a maturity date on which they are redeemed, with the borrower usually making a fixed interest payment each year until the bond matures.

Question 36

What are treasury bills?

Answer 36

Short-dated government debt, which pays the holder a fixed rate of interest until redemption.

Question 37

What are commercial bills?

Answer 37

Short-dated debt, issued by private businesses, which pays the holder a fixed rate of interest.

Question 38

What are corporate bonds?

Answer 38

Debt security issued by a company and sold as new issues to people who lend long term to the company. They usually can be resold second hand on a stock exchange.

Question 39

What are government bonds?

Answer 39

Debt security, issued by a government and sold as new issues to people who lend long term to the government. they can be resold second hand on a stock exchange.

Question 40

What is capital gain?

Answer 40

The profit made on the buying and selling of financial and other assets.