macro topic 4 financial markets and monetary policy

Question 1

characteristics and functions of money

Answer 1

-medium of exchange
-a measure of value
-a store of value
-a method of deferred payment

Question 2

near money

Answer 2

non cash assets that can easily be converted into money eg bonds

Question 3

the money supply is

Answer 3

the total amount of money circulating in an economy

the stock of currency and liquid assets in an economy. it includes cash and money held in savings accounts

Question 4

narrow money is

Answer 4

physical currency as well as deposits and liquid assets on the central bank

Question 5

broad money includes

Answer 5

Broad money includes less liquid assets

Question 6

debt represents what firms..

Answer 6

owe

Question 7

equity represents..

Answer 7

all physical and financial assets owned by a firm

Question 8

in the money market what is traded

Answer 8

liquid assets
used to borrow and lend money in the short term

Question 9

the capital market is where

Answer 9

equity and debt instruments are bought and sold

Governments and firms use capital markets to borrow and lend long term.
This is usually for longer than 12 months.
Borrowing takes place on the capital markets by issuing bonds and shares.
Bonds (government or corporate) can be issued for as long a duration as people are willing to lend to it.

Question 10

the foreign exchange market is where

Answer 10

where currencies are traded mainly by international banks
determines what the relative value of different currencies will be

Question 11

the role of the financial market

Answer 11

-facilitate savings
-to lend to businesses and individuals
-to facilitate the exchange of goods and services
-to provide forward markets in currencies and commodities
-provide a market for equities

Question 12

how can firms raise finance

Answer 12

issue shares
corporate bonds
borrow from the bank

Question 13

if the interest rate falls will bonds have higher or lower value

Answer 13

higher because it carries a higher interest rate than the current market conditions

Question 14

what is a coupon in terms of bonds

Answer 14

interest payments to the investor
the interest rate is fixed on the duration of the bond

Question 15

what value do investors buy bonds at

Answer 15

face value (nominal value)

Question 16

what is maturity in terms of bonds

Answer 16

the period of time which the financial asset is outstanding

Question 17

a commercial bank manages

Answer 17

deposits, cheques and saving accounts for individuals and firms. they can make loans using the money saved with them

Question 18

what do investmant banks do

Answer 18

facilitate the trade of stocks, bonds and other forms of investmet. government regualtion is weaker and so has a higher risk tolerance

Question 19

the main functions of a commercial bank

Answer 19

-accept deposits
-provide loans
-overdraft
-investment of funds
-agency functions

Question 20

what does a commercial banks balance sheet show

Answer 20

its assets and liabilities

Question 21

what are assets on a banks balance sheet

Answer 21

resources owned by the bank

Question 22

what are liabilities on a banks balance sheet

Answer 22

amount owed by the bank and are a source of finance for the bank

Question 23

what are owners equity on a banks balance sheet

Answer 23

the owners share of the business
represents the value of the business that belongs to the owner after all debts have been repaid

Question 24

objectives of a commercial bank

Answer 24

-liquidity
-security
-profitability

Question 25

potential conflicts between the objectives of a commercial bank

Answer 25

-liquidity v profitability -security v profitability

Question 26

process of creating credit by commercial banks (fractional banking)

Answer 26

-initial deposit -reserve requirement -lending and loan -deposit expansion -money supply expansion

Question 27

a central bank is the

Answer 27

the governments bank that issues currency and controls the supply of money

Question 28

role of the central bank

Answer 28

-lender of last resort -monetary policy -the governments banks -regulate the banking industry

Question 29

what does the term 'run on the bank' mean

Answer 29

when consumers all withdraw their bank deposits at once because they believe the bank will fail

Question 30

monetary policy comitee

Answer 30

alters interest rates to control the supply of money independent from the gov and 9 members meet 8 times a year to discuss what the rate of interest should be

Question 31

what is the target inflation rate

Answer 31

2%

Question 32

what is the base rate

Answer 32

the interest rate set by central banks for lending to other banks. this is used as a benchmark for interest rates set by commercial banks

Question 33

the use of monetary policy aims to acheive

Answer 33

-a low and stable rate of inflation -low unemployment -reduce trade cycle fluctuations -promote a stable economic environment for long term growth -control the level of imports and exports

Question 34

expansionary monetary policies include

Answer 34

-reducing interest rates -increasing qe -depreciating the exchange rate

Question 35

expansionary monetary policy aims to shift ad to the

Answer 35

right

Question 36

expansionary monetary policy generate further

Answer 36

economic growh

Question 37

contractionary monetary policy can

Answer 37

slow down economic growth or reduce inflation

Question 38

contractionary monetary policies include

Answer 38

-increasing interest rates -decreasing or stopping qe -appreciating the exchange rate

Question 39

expansionary monetary policy aims to shift ad to the

Answer 39

left

Question 40

monetary policy tools and sctions

Answer 40

-interest rates -quantative easing -exchange rates -money supply -forward guidance -funding for lending

Question 41

what is quantative easing simply

Answer 41

when the bank of england electronically creates more money and uses this to by government bonds

Question 41

limitations of quantative easing

Answer 41

-imports are more expensive and raw materials that are imported could trigger cost push inflation -lower long term interest rates are less attractive to potential investors -asset prices could be driven up and could create asset bubbles

Question 42

how is the money supply used as a monetary policy tool

Answer 42

-money supply can be controlled by using required reserve requirements or quantative easing

Question 43

what is forward guidance

Answer 43

a communication tool used by central banks to provide insight into future monetary policy intentions helps guide economic behaviour by managing expectations about future monetary policy actions

Question 44

factors considered by the MPC when setting the bank rate

Answer 44

-unemployment rate -savings rate -consumer spending -high commodity prices -exchange rate (-stage of trade cycle)

Question 45

what is mpc main goal

Answer 45

to achieve price stability

Question 46

regulatory bodies det up to oversea the financial system in the UK

Answer 46

-the prudential regulation authority (PRA) -the financial policy committee (FPC) -the financial conduct authority (FCA)

Question 47

the fpc regulates

Answer 47

risk in banking and ensures the financial system is stable

Question 48

why was the fpc established

Answer 48

after the 2008 recession to create financial stability

Question 49

how does the fpc adress risks to the financial system

Answer 49

they created the stress test for banks to help them withstand future economic shocks and require banks to be able to recover potential losses using a capital buffer also made tighter regulations on the amount individuals are able to borrow based on set incomes

Question 50

what does the fca regulate

Answer 50

financial services and financial markets int the uk. ensuring that they are operating fairly and in best interest of consumers and promote competition

Question 51

what does the pra promote

Answer 51

safety and stability of banks, building societies, investment firms and credit unions and ensures policy holders are protected -helps avoid insolvency of banks - does this by monitoring adherence to rules and regulations

Question 52

why a bank might fail

Answer 52

-moral hazard -systematic risks -liquidity and capital ratio

Question 53

what is systematic failure

Answer 53

when a minor local problem in one country's financial sector has international consequences. a single bank can trigger the breakdown of an entire market or even the entire financial system

Question 54

liquidity ratio

Answer 54

a liquidity ratio measures a company's or an individual's ability to meet its short-term obligations using liquid assets higher ratio the greater the safety margin of the bank

Question 55

capital ratio

Answer 55

It compares the bank’s capital (what it owns) to its risk-weighted assets (what it’s lent out, adjusted for how risky those loans are).