Money & Financial Markets

Question 1

Outline the characteristics of money

Answer 1

• portable
• divisible
• durable
• limited supply
• acceptable
• difficult to forge

Question 2

Outline the functions of money

Answer 2

• medium of exchange
• store of value
• unit of account
• method of deferred payment

Question 3

What does M0 consist of?

Answer 3

Coins, bank notes

Question 4

What does M1 consist of?

Answer 4

Coins, bank notes, savings

Question 5

What does M2 consist of?

Answer 5

Coins, bank notes, savings, money for lending

Question 6

What does M3 consist of?

Answer 6

Coins, bank notes, savings, money for lending, government + national bank reserves

Question 7

Define money available for lending

Answer 7

Bank capital, deposits from customers

Question 8

Define narrow money

Answer 8

M0-M2
Very liquid assets

Question 9

Define broad money

Answer 9

M2 upwards
Total amount of money held in the economy

Question 10

What is the monetarist model on the money supply?

Answer 10

• changes in the money supply are the main causes of changes to nominal gdp
• the money supply has a significant impact on AD
• there should be a focus on the money supply to maintain price stability within the economy
• excessive expansion of the money supply leads to inflation

Question 12

Outline the quantity theory of money

Answer 12

MV = PQ
M= money supply
V= velocity of money
P= price level
Q= real output

Question 13

Outline the role of financial markets

Answer 13

To channel funds from those with surplus funds to those who have a shortage of funds

Question 14

What do financial markets do?

Answer 14

• capital allocation
• risk management
• determining price
• fund for investment

Question 15

What are the three types of financial markets?

Answer 15

Money market
Capital market
Foreign exchange market

Question 16

What does the capital market do

Answer 16

• provides medium and long term finance to firms and governments
• issue bonds (corporate and government)

Question 17

Define the primary market

Answer 17

Where newly issued securities are sold

Question 18

Define the secondary market

Answer 18

The trade of previously issued or second hand securities

Question 20

Outline the function of the secondary market

Answer 20

To increase the liquidity of second hand securities, making it easier for buyers to manage investments and sell when required

Question 21

What does the foreign exchange market do?

Answer 21

The buying and selling of different currencies

Question 22

Define spot transactions

Answer 22

Immediate exchange of foreign currency

Question 23

Define forward markets

Answer 23

The exchange of foreign currencies at some specified time in the future, usually used by exporters and importers to protect themselves against exchange rate risks

Question 24

Define debt

Answer 24

Borrowing money that has to be repayed with interest

Question 25

Define equity

Answer 25

Giving the provider of funds an ownership stake in the enterprise

Question 26

Define debt financing

Answer 26

Borrowing money from an outside source that is then repayed with interest

Question 27

Define debt equity

Answer 27

Raising capital by selling shares to investors