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Macro Four Flashcards

Money Supply, Financial/Banking System, Monetary Policy and Quantity Theory of Money (63 cards)

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1
Q

What are the different uses of money as it evolved

A

To barter
As commodity money
As representative money
As token money

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2
Q

What is Commodity Money

A

The first type of money, has its own intrinsic value and doesn’t require the double coincidence of wants

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3
Q

What is Bartering and what does it require

A

trading one good or service for another and it requires a double coincidence of wants

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4
Q

What is Representative Money

A

Money is backed by gold held in a bank but may be represented by something else

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5
Q

What is Token Money

A

Bears no relation to anything of intrinsic value

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6
Q

What are the functions of money

A

A medium of exchange or means of payments
A store of value
An unit of account or measure of values
A standard of deferred payment

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7
Q

What are the characteristics of money

A

Acceptable to all
Limited in Quantity
Difficult to Forge
Durable
Portable
Divisible

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8
Q

What does liquidity mean

A

The ease with which an asset can be converted into cash without loss of value

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9
Q

What are the 6 most to least liquid assets

A

Cash
Sight Deposits
Time Deposits
Government Bonds
Shares
Physical Assets

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10
Q

If someone deposits £500, what is that to the bank

A

A liability

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11
Q

What is a financial market

A

A market in financial assets, including the market for commodity futures and insurance products

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12
Q

What are the types of financial market

A

Money
Capital
Foreign Exchange

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13
Q

What trading occurs in the money market

A

Providing short term lending/borrow

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14
Q

What type of trading occurs in the capital market

A

Trading in securites such as shares and bonds in the medium to long term

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15
Q

What is the Foreign exchange market

A

Trade in foreign currencies

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16
Q

What forms can bonds take

A

Corporate (firms) or Government (gilt)

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17
Q

What two markets make up the capital financial market and what do they do

A

Primary
For newly issued government bonds
Secondary
Where bonds are resold second hand

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18
Q

What two markets make up the foreign exchange financial market and what do they do

A

Spot
Immediate transfers
Forward
At some time in the future, by importers/exporters to protect against change

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19
Q

Bills are sold at ____ and redeemed at ____

A

Sold at discount and redeemed at parity

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20
Q

What forms can bills take

A

Treausury (government) or Commerical (firms)

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21
Q

What is a bond

A

A form of long-term borrowing and come with a guaranteed amount of annual interest called a coupon

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22
Q

What is a coupon

A

A guaranteed amount of annual interest on a bond

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23
Q

How is yield worked out (as a decimal)

A

Annual Coupon divided by Current Market Price

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24
Q

What happens to yield when a bonds price rises

A

Because the coupon is fixed, as a percentage of a higher price the yield must fall

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25
What are central banks
Acts as a national bank and provides services to the government
26
What issue can arise from central banks acting as a "lender of last resorts"
Moral Hazards
27
What are commerical banks
A financial institution that aims to make a profit by selling banking services to customers
28
What are Investment Banks
A bank that doesn't accept deposits from the public, would instead offer financial advice and help with the stock market. Deals with financial markets on their own accord
29
What makes up a Commerical Bank's balance sheet
Assets, Liabilities and Equity
30
Examples of Liabilties (and Equity) for a Commerical Bank
Long-term borrowing Short term borrowing Customers' deposits Share Capital Reserves
31
What are the three objectives of a commerical bank
Profitablilty Security Liquidity
32
What is the fractional reserve banking system
Banks are required to keep a minimum proportion of their deposits as cash (called the reserve requirement)
33
How is the money multiplier worked out
1 over the reserve requirement (as a decimal)
34
What are the functions of a Central Bank
Help maintain macroeconomic stability Bring about financial stability Act as a lender of last resort Acting as the banker's bank Government bank International obligations
35
What is the time lag that a change in the Bank Rate will affect output
1 year
36
What is the time lag that a change in the Bank Rate will affect inflation
2 years
37
What is the size of the effect of bank rate changes on output
0.2% - 0.35%
38
What is the size of the effect of bank rate changes on inflation
0.2 pp - 0.4 pp
39
What is helicopter money an alternative to and what does it do
It's an alternative to quantitive easing and it is giving money directly to citzens
40
What are factors influencing Base Rate Decisions (there are 7!)
GDP growth and spare capacity International data - costs of imports rising Labour markets - unemployment/ wage rate Trends in Foreign Exchange markets Consumer Confidence Business Confidence Asset prices
41
How can central banks influence the growth of the money supply
Volume of cash produced Interest rates Set reserve requirement Open Market Operations Quantitative easing
42
First stage of quantitive easing (With permisson from...)
With permission from the Treasury, B.O.E credits its own account with newly created money, thus increasing the money supply
43
Second stage of quantitive easing (Uses this money to buy..) How would you show this on a graph
The B.O.E uses this money to buy financial assets (mostly bonds) in secondary capital markets from banks and financial institutions. This increases demand for bonds causing the price to rise
44
Stage Three of Quantitive Easing (Given that government bonds...)
Given that government bonds have a fixed coupon (the amount of interest doesn't change) the more expensive the bonds are the lower the yield *insert numerical example*
45
Stage Four of Quantitive Easing (This brings down the overall...)
This brings down the overall cost of borrowing across the economy as lower yields on bonds drive investors to other markets (...) As a result, banks can remain competitive as an investment even with lower interest rates
46
What happens as Stages 3 and 4 are happening in an economy (Private sector... loanable funds)
Buying bonds increases the private sector's assets and their ability to buy goods and services Banks have more loanable funds making it easier to lend money, thus boosting consumption and investment
47
Stage 5 of Quantitive Easing (Aggregate demand...)
Aggregate demand increases due to increased business and household confidence and debt financied consumption and investment
48
Final stage of Quantitive Easing (Increased...)
Increased spending and employment return inflation in the UK to economy to its 2% target
49
What is the Quantity Theory of Money
Money Supply X Velocity of Circulation == Price Level X Quantity of Goods/Services Sold
50
What does Macroprudential mean and which regulator(s) manage it
Concerned with identitfying and monitoring risks to the overall stability of the financial system and acting to remove those risks Financial Policy Committee (part of the BOE)
51
What does Microprudential mean and which regulator(s) manage it
Has a focus on ensuring the stability of individual banks and financial institutions - identitying, monitoring and acting on risks to individual firms Prudeuntial Regulation Authority (Part of the BOE) FInancial Conduct Authority (Not a part of BOE)
52
What is the primary function of the FPC
To maintain the stability of the financial system overall with a secondary objective in supporting the gov's economic policy
53
What is the primary function of PRA
Regulates and supervises individual banks, building societies, credit unions insurers and major investment firms Responsible for stress tests
54
What is the primary function of FCA
Aims to make sure financial markets work well by promoting competition and ensuring consumers get a fair deal and ensuring firms act with integerty. Acts similarly to regulator in good markets
55
What are stress tests
Differs from year to year but looks at individual banks' resilience to various adverse scenarios such as recession or rising unemployment
56
What is a run on the bank
Mass deposit withdrawls from a bank
57
What is a moral hazard
Exists when a firm or individual takes on too much risk knowing someone else will bear the significant portion of the cost
58
Why can a bank fail
Recklessness Low-capital ratio Low Liquidity ratio Governments let them fail Run on the bank Actions of regulator Rogue employees
59
How can recklessness occur in a bank
Weak regulations or a lack of "firewall" between investment and commerical wings (Glass-Steagall Act of 1933 to protect depositors from losses through stock speculation)
60
What is a bank's capital ratio
A measure of how much of a bank's funding comes from a form of equity (shares and reserves)
61
Is a bank safer with higher or lower capital ratio
Higher, since this never has to be repaid (unlike liabilities)
62
What is a bank's liquidity ratio
A measure of the ratio between the bank's liquid assets and the expected outflows from the bank
63
Is a bank safer with higher or lower liquidity ratio
Higher, the more cash the business holds relative to withdrawals, the safer it will be

Economics (12 decks)

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