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MACROeconomics > Financial Markets and Monetary Policy > Flashcards

Financial Markets and Monetary Policy Flashcards

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1
Q

List and explain the functions of CB

A

Gov’s bank
Lender of last resot
Regulaition of banking industry
Implements monetary policy

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2
Q

What are the objectives of MP and which is the main one?

A

Main - Low and stable inflation
Low unemployment
Control economic cycle fluctuations
Long term and stable economic growth
Net external balance management

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3
Q

Tell me all info about MPC

A

Monetary Policy Committe
9 members, meet rough every 6 weeks
voting system
main target is infaltion of 2% CPI
There is a time lag between decisions and affect.

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4
Q

Explain all about expansionary monetary policy

A

Interest rate and exchange rate decrease
Quantitative easing/money supply increase
Increase borrow, spending and investment
Economic growth and inflation
Lower unemployment
Rising exports mitigates by increase income for imports.

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5
Q

Explain everything a depreciation of exchange rate does

A

Exports cheaper
Net external demand increase
BOP of current account improves
Mitigates by rising incomes (if monetary policy) and buying imports

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6
Q

Draw the Expansionary Monetary policy

A

Check

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7
Q

Explain Contractionary Monetary Policy

A

Rise interest and exchnage rates
Decrease QE less money supply
Less borowing, spending and investment as too expensive
discretionary income decrease as more expensive repayments on existing loans
Hot money flows increase, appreciating exchnage rate
Net external demand worsen

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8
Q

Draw Contractionary Monetary Policy

A

Check

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9
Q

What are the Monetary Policy Actions

A
  1. Interest rates
  2. Exchange rates
  3. Money supply
  4. Forward guidances
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10
Q

What is Quantitative easing?

A

Occurs when CB purchases securities to increase money supply in market

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11
Q

How is interest rate set and any definitions included?

A

By the bank rate
rate at which CB lends to other banks

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12
Q

What are forward guidances?

A

Giving the public insight into future monetary policy actions to influence economic behaviour.

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13
Q

What factors for MPC consider when setting interest rate?

A

House prices
Commodity prices
Unemployment level
Stage of economi cycle

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14
Q

Why are house prices a factor to be considered by MPC. Give example

A

A significant indicator on economic activity and financial stability.
EG higher prices, higher value of assets, higher confidence, more borrowing

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15
Q

Draw the Transmission Mechanisms

A

Check

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16
Q

What does the transmission mechanisms tell us about the economy?

A

Shows there is a time lag between decision and effects of that decision being apparent

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17
Q

What is the official rate?

A

Bank rate (base rate) rate at which CB lend to banks

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18
Q

Difference between market rates and base rates

A

Market rates is the cost of borrowing or reward of saving influence by supply and demand
Bank rate is set by the MPC

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19
Q

What can monetary policy depend on?

A

Price elasticity of demand

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20
Q

What are the regulatory bodies of financial system?

A

Prudential Regulation authority
Financial Policy Committe
Funancial Conduct authority

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21
Q

What does the PRA do?
Give an example of where PRA has acted?

A

Reglulates Banks, insurers and cooperative institutions
Protect banks from insolvency
2008 joines hands with Royal Bank of scotland

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22
Q

Give a real example when PRA acted

A

2008 crash, Royal bank of Scotland worked with PRA

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23
Q

What does the FPC do?

A

Indentify, track and address risk to financial system.
Created stress tests so banks can widthstand economic shocks.
Required capital buffer
Decided the LTI ration to reduce excessive household debt

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24
Q

What has the BOE done with bank rates recently

A

dropped 9 times between 2007 and 2009
From 5.75 to 0.5%

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25
What does the FCA do
Regulated financial service firms so the operate fairly in best ienrest of its customers
26
Give an example of when FCA acted?
2003, FCA reviews NatWest groupf or potential data protection breaches
27
Who made LTI
FPC
28
why was LTI made
For morgages to prevernt excessive household debt
29
Give reasons why banks fail
1. High risk loans (lead to debt and run on bank) 2. Regulation violation (inadequate anti-money laundering 3. Speculative and market bubbles 4. Asymmetic infomation (between regualtors and institutions)
30
Give na example of regulation violation
HSBC accused of facillitating money laundering activites and as they did not monitor
31
WHat are speculative bubbles
Prices driven abouve fundamental value frm specualtion and optimism
32
What is the liquidity ratio?
THe ratio of bank's cash and other liquid assets to its deposits.
33
Why is liquidity ratio important
Need to be high so bank can meet short-term obligations and cash needs like widthdrawral requests
34
What is capital ratio?
Amount of (share) capital as a proportion of its loans
35
Why do we have capital raito?
Asses a banks ability to cope with potential losses and maintain stability
36
What is the liquidity trap?
Where monetrary policy becomes ineffective at stimulating economic growth and interest rates are already low, and people would prefer to save than spend
37
What is moral hazard
Occurs when economic agents has an incentive to increasr eisl as if they fails omeone else will face consequences
38
What is system failure?
When minor local problems in one country's financial sector has international sector
39
What is a default on loans?
Unable to pay back
40
What is bartering?
The exchnage of goods an services without using money.
41
What are the four functions of money
1. Medium of exchange 2. Measure of value buyers and sellers can make decisions) 3. Store of value )not a presihable goods) 4. A method of deferred payment (pay later)
42
What are characteristics of goods money?
Acceptability Portability Divisibility Uniformity Scarcity Durability
43
Why does good money need to be scarce
Remain desireable
44
What is mney supply
Refers to the total financial assets functionign as money within the economy
45
What are the two types of money supply
Demand deposits Near money assets
46
What are demand deposits
Fund held in a current account that holders cna widthdraw froma t any time with no prior notice
47
What are near money assets
Financial instruments that are not directly funcitoning as money but are highly liquid
48
Give example of nea rmoney asset
Saving account
49
What does the Ms represent
M0 Physically currency and central banl reserves 1 Currency in circulation and demand deposits 2 M1 and near money assets 3 Mz and large time deposits.
50
What are narrow money
M0
51
What are broad money
M3
52
What is liquidity?
Measures the ease in which an asset can be converted into cahs
53
Give examples of illiquid assets
Houses, Les so shares
54
What are shares
Represents part of wnership of a company entitiling shareholder to dividend and voting rights and are traded on the stock echange
55
WHat is the most liquid thing
cash
56
What are dividends?
Proportion on company's profits given earned by shareholders
57
What are the roles of financial markets?
1. Facilitate savings 2. Lend to businesses and individuals 3. Facilitate exchnage of g and s 4. Provide forward markes in currencies and commodities 5. Matket for equities
58
What are forward markets
Allows to buy or seel at a set future date a price
59
Why are forward markets good
Provides price stabilty
60
How do forward markets provide price stability
Potects prices and allows purchase at a fixed price, not affetced by future price fluctututations
61
What is speculation?
Buying or sellign assets that has substantial risk of loosing value but also hold the expectation of a sig gain
62
What are the types of fianacial markets?
Money market Capital market Foriegn exchnage market
63
Talk amount money market (any definitions included)
Provides short term finance COmemrcial bills - Short term debt issue by private businesses wich pay holder a fixed rate Treasury bills - Gov issues short term debt securities with fixed rate
64
what are cpaital markets? (any definitions)
Provide medium to long term finance Shares Corporate bonds (issues by companies and are sold to individuals who lend money to compacny Governmetn Bonds - debt securities that are issued by gov to infividuals
65
WHy do governments issue bonds?
To finance budget deficit
66
What are less risky loans
Short term, lower inyterest
67
WHat is the foreign excnage market
A global platform for trading currencues Central bank, commercial bak, individuals and investors cna use
68
What are other words for FEM
Forex FW currency market
69
What is short term finance?
Less than a year roughly
70
What type of assets are commercial and treasury biils?
Short term finances and consideresd liquid
71
What is IPO
Initial public offering
72
What are sources of finance for a business
Retained profit Sell bonds Sell shares
73
What are creditors
Individuals and businesses that lnd money to another party
74
WHat is equity
Ownership in a company
75
How is debt and equity relavant to firms?
both sources of finance
76
Give info of how debts are as a source of fiannce
No ownership rights Money must be paid with interest no votign rights
77
Give info on equity as a source of fiannce
Shareholders have owenership rights Shareholders entitiles to profits Often has voting rights
78
What are itnerest rates
the cost of borriwng or the reawrd of saving
79
What are bond prices?
Amount investors are willign to pay for gov bonds
80
WHat is nominal value of a bond
Par vlaue, face calue IPO
81
what are coupons
Periodic fixed itnerest payments made by the issuer, usually expressed as a % of nominal value of a bond
82
What are maturity
The date of expiration. Illiquid investment until date
83
84
What are secondary markets abd what on there
Reselling items such as bonds
85
Ig the government starts issuing bonds with higher interest rates, what happens to exisitn bonds?
Demand decrease, prices fall
86
WHat are commercial banks definition
Financial institutions that sell banking services to their customers, both personal customers and business
87
What is Investment banks definition
Global banks that assit in raising finances for companies, financial institutions, goc and organisation
88
Talk about investment banks and examples
Issue bonds, provide advisory services for mergers and aquisitions Global presence JP morgan, Morgan Stanley, Citigroup
89
Talk about Commercial banks and examples
Private loans, morgages and deposits/savings Branched Barclays and HSBC
90
What are multi banks
Have both features of C And I banks
91
What are the assets on the COmmercial banks balance sheet
Bills fixed assets Liquid assets investment advances
92
What are liabilities on Commercial balance sheet
Capital Borrowing Depostis
93
What is share capital
Money raised from sales of shares
94
WHat does sahre capital include?
IPO and retianed profit
95
What are the three thigns that banks have trade offs with
Liquidity security Profitability
96
What is the trade off between profitablity and liquidity
Higher interes rates more proft but less liquid (maturity fate cna be higher)
97
Trade off between security and profitability
Higher interest, Security less as more risky due to higher interest and harder to pay back
98
What does it mean when banks create credit
Monetary value created through extension of loans and deposits
99
What does the money supply expansion depend on
Customers confidence in banks
100
Explain teh creation of credit
1. Initial depost 2. Keep reserve requirements 3. Issue remainign as loan 4. They deposits 5. Repea 6. Money supply expansion
101
What are two other words for creating credit
Factional banking Money supply expansion
102
WHy is increas ein supply of money good?
Typically lowers itnerest rates, ivnestment etx comes after
103
Why does the financial sector need to be secure?
Provides essential economic activity, enabiling hosuehold and businesses to borrow, save invest and make payments, driving eocnomic growth. It is essential

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