financial sector

Question 1

what is narrow money

Answer 1

money that can be used immediately for transactions e.g physical notes

Question 2

what is broad money

Answer 2

Includes narrow money plus less liquid forms of money so also potential purchasing power e.g savings account

Question 3

what are the 4 functions of money (narrow)

Answer 3

be a medium of exchange
be a measurement of value
a store of value- allows you to store purchasing power for the future
a standard for deferred payment- accepted as future payments like loans

Question 4

what are 3 characteristics of money

Answer 4

acceptable to all
portable
divisible

Question 5

what is the money supply

Answer 5

the total amount of money circulating in an economy.

Question 6

what assets have the characteristics of money

Answer 6

can be argued that no particular asset has all the characteristics of money

Question 7

what is near money

Answer 7

asset that cant be used as a medium of exchange itself but can readily be converted into money and is a Unit of Value and a store of value e.g saving accounts

Question 8

how is money created

Answer 8

Savings are lent out to borrowers as in loanable funds theory
money multiplier
banks create new broad money by making loans to households and firms

Question 9

what is the money multiplier

Answer 9

idea assumes that banks must keep back a minimum reserve requirement (ratio) (10% in USA) as liquid funds to be able to repay depositors (savers) without notice. It is often assumed this is controlled by the CB.

Question 10

what happens when a loan is created

Answer 10

Creates new money and deposits it in the customer’s account and so new money is created. It funds this new loan by borrowing from other banks (wholesale funding), raising new capital or savers deposits.

Question 11

whats the issue with this method

Answer 11

does not rely on savers to fund loans – it lends first and then looks for funding.
may be bad if one bank collapses- systematic risk (e.g in 2008 financial crisis)

Question 12

what are the 3 motives as to why people demand money

Answer 12

Transactions Motive
Precautionary Motive
Speculative Motive

Question 13

whats a tm

Answer 13

paying daily expenses e.g paying bills

Question 14

whats a pm

Answer 14

saving money

Question 15

whats a sm

Answer 15

buy shares or bonds

Question 16

what do keynes believe about saving

Answer 16

people keep money for emergencies

Question 17

what did classical say

Answer 17

believe there is no such concept as Demand for money people only need it to buy g & s.

Question 18

what is the liquidity preference schedule

Answer 18

shows the relationship between the interest rate and the quantity of money people want to hold (their demand for money).

Question 19

who controls the supply of money

Answer 19

CB does this independently of its price (price of money is the rate of interest)
supply is fixed so draw it inelastic

Question 20

what do households and firms do when there is excess demand

Answer 20

If r is r1 then there is excess demand for money- d shifts right

Households and firms will have to sell non financial assets e.g bonds or withdraw saving from notice accounts to access more money.

Question 21

what do banks do when there is excess demand

Answer 21

Raise interest rates and bonds would have to be sold at lower than nominal value to raise their interest rate yield.

Question 22

what causes the demand curve to shift

Answer 22

changes in income- more spending

Change in price level- g/s become more expensive so need more money to fund this

Change in perceived risk of holding non money assets e.g bonds/ shares - If people think that holding non-money assets has become riskier, they’ll prefer to hold more money instead e.g a bond may fall in its value

Question 23

what is the fisher and quantity theory of money

Answer 23

Fisher argued that a 1% rise in inflation would result in a 1% rise in nominal r.

So if the inflation rate was 10% and the real r is 3% then the nominal r must be 13%

Question 24

what is the fisher equation

Answer 24

MV=PT

Question 25

what is 'm'

Answer 25

total amount of money in the economy

Question 26

what is 'v'

Answer 26

the velocity of the circulation (the number of times money has changed hands over a period of time)

Question 27

what is 'p'

Answer 27

average price of each transaction in the economy

Question 28

what is 't'

Answer 28

total number of transactions made of a period of time

Question 29

what are national income implications on the money supply (ms)

Answer 29

As the economy grows the Ms must rise in line (as a %) otherwise prices will fall. Deflation is not desirable in longer term Expansion of Ms above the rate of economic growth will only cause inflation

Question 30

what is the role of the financial sector

Answer 30

Enables households and firms to save in secure amounts (loanable funds market) Provides loans and other forms of borrowing to households and business lras focus Enables financial assets e.g shares to be traded on capital markets (lras focus) as it provides a platform for it to be done on, ensures liquidity etc Enables currency to be traded – x-m focus

Question 31

whats the role of the financial sector in supporting econ growth

Answer 31

Stable financial sector provide security and certainty for households and firms Credit is provided to enable firms to I Consumer spending in a large part relies on credit e.g loans, credit cards support C & I (AD and LRAS) so is crucial to SR & LR economic growth

Question 32

what are hedge funds

Answer 32

way to reduce or protect against financial risk, usually by using financial instruments like derivatives (financial contract of the value of something e.g a contract future agreements) buying insurance to protect investment

Question 33

what is short selling

Answer 33

when you borrow a financial asset (like a share), sell it at the current price, and hope to buy it back later at a lower price — keeping the difference as profit.

Question 34

what role does forex play in the financial sector

Answer 34

need to convert currencies to import or export goods and services. FDI influence supply and demand of currency

Question 35

what are the 3 different financial markets

Answer 35

money markets capital markets forex market

Question 36

what is the mm

Answer 36

for Short term lending (24hr to 1 yr) – to all economic agents

Question 37

what is the cm split into

Answer 37

primary market and secondary market

Question 38

what is the cm

Answer 38

Medium term finance for firms and governments. This is achieved via selling bonds, shares or through loans.

Question 39

what is the primary market

Answer 39

where new shares and bond issues are created.

Question 40

what is the secondary market

Answer 40

where shares and bonds are resold on the stock markets.

Question 41

what are the two markets in the forex market

Answer 41

spot market future market

Question 42

what is the forex market

Answer 42

where shares and bonds are resold on the stock markets.

Question 43

whats the spot market

Answer 43

for current transactions

Question 44

whats the future market

Answer 44

for agreeing the price of currency at a future date (enables hedging and more security for trade)

Question 45

whats the two types of banks

Answer 45

retail (e.g Barclays) commercial

Question 46

what are the 3 core functions of retail banks

Answer 46

accepting deposits in order to provide security and to facilitate saving lending money to different economic agents who wish to borrow providing an efficient means of payment and transferring funds between different economic agents

Question 47

what do commercial banks deal with

Answer 47

businesses rather than individuals, often offering the same or similar e.g JP Morgan

Question 48

what is investment banking

Answer 48

help companies, the government and other financial institutions e.g. insurance companies giving advice, arranging issues of shares etc

Question 49

what are similarities of certain banks that provide both investment and commercial banking services

Answer 49

They provide advice and support for firms seeking a merger or takeover in terms of price, timing and strategy They provide advice and support to the government if it wishes to privatize a public sector enterprise. charge large fees

Question 50

whats an example irl type shi context

Answer 50

Goldman Sachs, Barclays, Bank of America Merill Lynch and UBS were appointed to lead the sale of the Royal Mail in 2013 (privation of royal mail) These banks were responsible for helping to structure the deal, setting the price for the initial public offering (IPO), and marketing the shares to potential investors.

Question 51

what is hedging

Answer 51

is a way of investing that reduces risk (hedging) by investing in a range of assets in order to attain a given return on the investment a positive return on investment, regardless of how the stock market is performing may sell when at higher price and buy back at lower

Question 52

pensions funds role

Answer 52

have paid contributions to the fund over the working life of the individual seen to be the biggest investor in the stock market invest in less risky shares as it is important that they can finance the retirement of individuals who have paid into a pension scheme

Question 53

insurance funds

Answer 53

taken out by economic agents to protect themselves in case of unfortunate events People are risk averse so are prepared to pay a premium that covers them in case of accident Not all customers will claim, allowing the insurer to have enough funds to pay out when required with a surplus to ensure a profit This gives economic agents the confidence to undertake risk with the knowledge that they are covered in the case of emergency situations

Question 54

what is the bond market

Answer 54

where bonds (debt securities) are bought and sold. econ agents can issue new bonds.

Question 55

what is a corporate bond

Answer 55

loan made to a company for a fixed period by an investor, for which they receive a defined return.

Question 56

why does the rate of interest vary for different markets (3)

Answer 56

higher risk= higher interest rate as less secure higher inflation=higher interest rates to maintain their real return supply and demand- higher demand= higher interest rates as less available to lend and vise verse

Question 57

whats a multinational corperation

Answer 57

large business that produces and/or sells goods and services in more than one country.

Question 58

what are 2 benefits of this

Answer 58

creates employment- pos mult in count infrastructure- often invest in training the workforce to improve their skills, and also spend money on local roads and transport to aid trading opportunities and distribution

Question 59

what are 2 drawbacks

Answer 59

environmental impact-may locate in places with fewer environmental laws so may increase pollution and create negative externalities profit motive- may exploit consumers and employees and could create monopolistic conditions

Question 60

not a flashcard but consider how this may affect economic indicators, poverty, distribution of income, international competitiveness, factors of production.