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

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2
Q

What are the 4 functions of money

A
  1. Needs to be used as a medium exchange acceptabel to all parties
  2. Money needs to be used as a standard of deferred payments
  3. Money needs to be used as a store of value so people can save money
  4. Money needs to be used as a unit of account
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3
Q

What will a fall in interest rate lead to…

A
  1. decrease in savings as there is less reqard for saving
  2. Increase in borrowing as price of borrowing has increased
  3. Lower mortgage repayments as cost of borrowing has decreased
  4. Investment will increase as firms can borrow more to invest
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4
Q

What will a rise in interest rate lead to..

A
  1. increase in savings as there is more reqard for saving
  2. decrease in borrowing as price of borrowing has increased
  3. Higher mortgage repayments as cost of borrowing has increased
  4. Investment will decrease as firms can borrow less to invest
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5
Q

What is the formula for compound interest

A

initial amount x (1 + interest rate) power of amount of years

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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
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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)
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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
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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
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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
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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
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12
Q

Eval Points for Importance of the financial Sector

A
  1. Age of consumers, younger consumers more likely to borrow while older ones will more likely have money saved
  2. Their attitude to risk
  3. Attitutde to borrowing/trust in banks, borrow from friends instead
  4. Level of individual motivation
  5. Level of consumer income (any left to save)
  6. State of the economy (if it looks bad people save more)
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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
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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
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