2.8 Role of Money and Financial Markets Flashcards
1
Q
What is money
A
Money is anything accepted as a means of payment for a good or service. This can consist of notes and coins, which is legal tender and bank deposits
2
Q
What are the 4 functions of money
A
- Needs to be used as a medium exchange acceptabel to all parties
- Money needs to be used as a standard of deferred payments
- Money needs to be used as a store of value so people can save money
- Money needs to be used as a unit of account
3
Q
What will a fall in interest rate lead to…
A
- decrease in savings as there is less reqard for saving
- Increase in borrowing as price of borrowing has increased
- Lower mortgage repayments as cost of borrowing has decreased
- Investment will increase as firms can borrow more to invest
4
Q
What will a rise in interest rate lead to..
A
- increase in savings as there is more reqard for saving
- decrease in borrowing as price of borrowing has increased
- Higher mortgage repayments as cost of borrowing has increased
- Investment will decrease as firms can borrow less to invest
5
Q
What is the formula for compound interest
A
initial amount x (1 + interest rate) power of amount of years
6
Q
What is the financial sector
A
- the financial sector involves financial organisations and the flow of human capital. These can include banks, insurance companies, building societies and mortgages, loans and savings accounts
7
Q
What are financial intermediaries
A
- financial intermediaries such as consumers and governments allow money to transfer from people who do not need it urgently (savers) to those who do (borrowers)
8
Q
What does the central bank do?
A
- decides base interest rate (bank rate)
- acts as a bank for commercial banks and the goverment
- Provides the British people with stability in the financial system
- Controls money supply
9
Q
What do commercial banks do?
A
- Aceept deposists/savings for conumers and pay interest
- Gives out loans at an agreed rate of interest
- Has safety deposit boxes for valuable items
- Provides foreign currencies for those who require it
- Makes payments for it’s consumers, for instance card payments
10
Q
What do Insurance Companies do?
A
- Financial instituitions that guarantee compensation for specified loss or damange
- e.g for someones passing they replace loss of income
- paid in monthly or annual premiums
11
Q
What are Building Societies
A
- A mutual financial insitution owned by it’s members
- Primarily to receive deposits and loan money to its members so they can purchase property
- Because they do not pay dividends, building societies often offer better rates of interest
12
Q
Eval Points for Importance of the financial Sector
A
- Age of consumers, younger consumers more likely to borrow while older ones will more likely have money saved
- Their attitude to risk
- Attitutde to borrowing/trust in banks, borrow from friends instead
- Level of individual motivation
- Level of consumer income (any left to save)
- State of the economy (if it looks bad people save more)
13
Q
Benefits of Credit
A
- Encourages consumer into buy now pay later schemes which increases consumption
- Firms can invest more without using profits
- Governments can spend credit when tax has not been enough
14
Q
Evaluation Points for Credit
A
- Businesses are charged for use of credit cards so may be reluctant to use them
- consumers who wish to pay off the full amount each month may not risk greater consumption
- Younger consumers will rely on cash and not financial products
- Overdrafts may be called in
- Interest Rates may vary
- Risk to consumers via online identity theft and fraudulent transactions