1 Flashcards
what is a financial market
Financial markets are markets where funds are transferred from lender-savers (people with excess funds) to borrower-spenders (people with a shortage of funds)
What role do financial markets play in the economy? (4)
Facilitate the transfer of funds between economic agents.
Influence personal wealth.
Affect the behavior of households and firms.
Impact the cyclical performance of the economy.
How do financial markets affect personal wealth? (3)
Financial markets provide investment opportunities, allowing individuals to:
Earn returns on savings.
Increase their net worth.
Manage financial risks through diversification.
why study money, banking and financial markets
- To understand how financial markets markets operate
- To examine how financial institutions work and their roles.
- To examine the role of money and monetary policy in the economy.
examples of financial markets (3)
Bond market
Stock market
Foreign exchange market
What is the role of the bond market?
The bond market determines interest rates and allows governments, businesses, and individuals to borrow money by issuing debt securities.
What is the role of the stock market?
The stock market allows companies to raise capital by issuing shares and provides investors opportunities to gain returns through stock ownership. It influences wealth and investment decisions.
What is the foreign exchange (FX) market?
The FX market determines foreign exchange rates, allowing currencies to be exchanged and impacting international trade and investments.
what is a security (financial instrument)?
A security is a claim on the issuer’s future income or assets, such as stocks, bonds, or derivatives.
what is a bond
A bond is a financial instrument that represents a loan made by an investor to a borrower (typically a corporation, government). It is a fixed-income security that pays periodic interest and returns the principal (face value) at maturity.
what are interest rates
An interest rate is the cost of borrowing or the price paid for the rental of funds
What does common stock represent?
Common stock represents a share of ownership in a corporation.
What is a share of stock?
A share of stock is a claim on the earnings and assets of a corporation.
Why do firms issue stock?
Firms issue stock to raise funds for financing their productive activities.
what is a foreign exchange market
- The foreign exchange market is where funds are converted from one currency into another.
what is the foreign exchange rate
- The foreign exchange rate is the price of one currency in terms of another currency.
- The foreign exchange rate is determined in the foreign exchange market (serious fluctuations occur in the FX market)
How do changes in a country’s home currency affect consumers and firms?
Changes in currency value affect:
Cost of imports
Cost of exports
Demand for foreign-produced goods
Demand for home-produced goods
What happens when a country’s home currency appreciates (increases in value)?
Imports become cheaper
Exports become more expensive
Demand for foreign goods increases
Demand for home goods decreases
What happens when a country’s home currency depreciates (loses value)?
Imports become more expensive
Exports become cheaper
Demand for foreign goods decreases
Demand for home goods increases
How does currency fluctuation impact international trade?
A stronger currency makes exports less competitive, while a weaker currency makes exports more attractive to foreign buyers.
what are Financial intermediaries
Financial intermediaries are institutions that borrow funds from savers and lend them to borrowers.
What is the largest type of financial intermediary?
Banks are the largest financial intermediaries. They accept deposits and make loans.
what are other financial institutions (5)
Insurance companies
Finance companies
Pension funds
Mutual funds
Investment banks
How does money supply play a role in generating business cycles?
Changes in the money supply can affect aggregate economic activity and the price level, influencing the business cycle (recessions and booms).
What characterizes a recession and a boom in terms of unemployment and inflation?
Recessions: high unemployment-low inflation
booms: low unemployment-high inflation
How does monetary theory explain business cycles?
Monetary theory links changes in the money supply to changes in aggregate economic activity and the price level, influencing business cycles.
what is monetary policy
- Monetary policy is the management of the money supply and interest rates
Conducted by a central bank (Bank of England in the UK, the Federal Reserve Bank (Fed) in the US)
what is fiscal policy
Fiscal policy is the management of government spending and taxation.
What is a budget deficit and surplus?
A budget deficit occurs when the government’s expenditures (G) exceed its revenues (T) in a given year.
deficit is financed by borrowing which leads to government debt
A budget surplus occurs when the government’s revenues (T) exceed its expenditures (G) in a given year.
What is aggregate output
Aggregate Output refers to Gross Domestic Product (GDP), which is the market value of all final goods and services produced in the domestic economy during a single year.
what is aggregate income
Total income of the factors of production (land, capital, labour) from producing goods and services in the economy during a single year.
what is the distinction between nominal and real GDP
Nominal GDP is the value of goods and services measured using current prices.
Real GDP is the value of goods and services measured with constant prices (adjusted for inflation).
why does NGDP increase over time
Production of goods increases
Prices of most goods also increase
what is RGDP per capita
the ratio of real GDP to the population of the country.
How do you calculate the Growth Rate of GDP?
The Growth Rate of GDP is calculated as:
gY = [(Yt − Yt−1) / Yt−1] ×100
Yt = GDP in the current year
Y{t-1} = GDP in the previous year
What is the difference between expansions and recessions in terms of GDP growth?
Expansions: Periods of positive GDP growth.
Recessions: Periods of negative GDP growth.
what is the aggregate price level
the average price of goods and services in an economy
What is the formula for the aggregate price level?
P= ∑(Pi×Qi) / ∑Qi
P= aggregate price level
pi = price of individual goods and services
𝑄𝑖 = quantity of individual goods and services
what is a GDP deflator
The GDP Deflator is the ratio of nominal GDP to real GDP in year 𝑡. It acts as an index number, with a value of 100 in the base year. It measures the overall level of prices in an economy, showing how much prices have increased compared to the base year.
What is the formula for the GDP Deflator in year t?
Pt= [NominalGDPinyeart/RealGDPinyeart]×100
what is infaltion
Inflation is a sustained rise in the general level of prices (price level).
Inflation rate is the rate at which the price level increases.
how is inflation calculated
[PriceLevelCurrentYear−Pricelevel PreviousYear / PriceLevelPreviousYear] x100
what is consumer price index
The Consumer Price Index (CPI) measures the average price of goods and services consumed by households. It tracks the cost over time of a specific list of goods and services representing the consumption basket of a typical urban consumer.
How is the CPI different from the GDP deflator?
The CPI focuses on the prices of goods and services consumed by households, while the GDP deflator reflects the prices of all goods and services produced in the economy.
CPI does not include goods sold to firms, the government or to foreigners.
The CPI includes imports but excludes exports whereas the GDP deflator exports but excludes imports
