2.8 The role of money and financial markets Flashcards
What is money?
Anything that is generally excepted as a means of payment for goods and services.
What do cheques and debit cards allow?
Cheques and debit cards allow money in the form of a bank deposit in current accounts, to be transferred between buyers and sellers
What is the difference between a credit and debit card?
A debit card takes money directly from your account and transfers it to the seller. If you do not have enough money, you cannot buy the product. A credit card enables you to buy goods whether or not you have money in the account. Retailers are charged for allowing you to use these cards in payment
What is meant by medium of exchange?
Medium of exchange is anything that sets the standard of value of goods and services accepted to all parties involved in a transaction
What is the financial sector?
The financial sector consists of financial organisations and their products, and involves the flow of capital
What does the financial sector help with?
Helps make markets to function and consumers/households, firms and governments to carry out economic activities, all within regulatory framework
What does helping involve?
Involves the lending and borrowing of money, both in the short and long run. This is done through financial intermediaries e.g. banks
Name the 4 most important financial institutions
The central bank, commercial bank, building societies, insurance companies
What is the role of the central bank?
In the UK the role of the central bank is to:
- issue bank notes. In England and wales only the bank of England can do this. The central bank also supervises the supply of money in the economy.
- control monetary policy by setting the bank rate, which is the interest rate set by the bank of England from which all other interest rates are calculated.
- provide financial stability by trying to ensure that the UK’s citizens can trust financial organisations.
- Manage the countries foreign reserves and if necessary intervene in the foreign exchange market.
- Act as the bank for commercial banks
- be the bank for the government
What is the role of commercial banks?
The basic role of commercial banks is to take deposits from customers and to turn them into assets for the banks. They do this by investing, or lending, the money that customers deposit, thus gaining a higher rate of interest than that which they are paying on the deposit.
How do banks set their interest rates?
In general, banks set the interest rates for borrowers higher than for savers.
State the 4 things banks do
- They accept deposits and in many cases pay interest on them. They also keep savings safe. If banks did not do this, each individual would have to protect their own savings.
- They make payments on behalf of their customers either by accepting their cheques or through card payments, mobile phone payments etc. This role has become more important as fewer notes and coins are used for purchases.
- They issue loans to individuals and firms, provide overdraft facilities.
- They offer safe deposit boxes for very expensive items, like jewellery and important documents, as well as providing foreign currencies for firms trading overseas and for peoples holidays .
What are loans?
Amounts of money that a bank gives a customer for a set period of time, on which interest is charged
What is meant by overdraft?
Overdrafts are when a bank allows a current account holder to use money even though it is not in their account.
What are building societies?
a mutual financial institution that is owned by its members. Its primary objectives are to receive deposits from its members and to lend money for members to purchase property.
What do building societies provide?
Provide savings products and mortgages for their members
What is a mortgage?
A financial agreement to borrow money in order to purchase a house
What are Insurance companies?
Financial institutions that guarantee compensation for specified loss, damage, illness or death in return for an agreed payment
what are their functions divided into?
Life insurance and general insurance
What does life insurance aim to?
Aims to pay out money to the surviving family if the person insured dies. Also covers areas such as long-term savings, pensions and annuities that are aimed at providing income during retirement
What are the 2 policies in life insurance? what are these policies for?
‘Whole-of-life’ policy which will pay out whenever the person dies so long as the premiums have been paid. ‘Term life insurance’ will cover the person for a specific period only. These policies are intended to help replace the loss of income due to the death of the person insured.
What does general insurance cover?
General insurance covers all non-life policies and includes: property, contents, motor, health, pets etc. It helps individuals and firms deal with unexpected events such as a burglary (contents). It also spreads the risk of loss across all insurance holders.
What is the importance of credit provision to consumers, producers and the government
Without credit the level of economic activity in an economy would be greatly limited. Credit cards provide a valuable way for consumers to buy now and pay later, and thus to increase consumption. Credit provision also allows producers to take out loans and enables them to grow, without having to be delayed because they have to first save all the necessary money. It allows governments to spend money even when tax revenue has not yet been collected or when they wish to spend more money than they intended to raise in taxes.
What is meant by liquidity? and who are the main producers of liquidity?
Liquidity refers to how easy it is to turn an asset into cash. Banks are the main providers, and do this by offering overdraft facilities
What is the importance of liquidity provision to producers, consumers, and governments?
It allows households and businesses to continue to function when faced with unexpected demand for cash
What is the importance of risk management to consumers, governments, and producers?
Financial institutions allow both individuals and businesses to pool their risks from exposure to the financial market.
What would an increase in interest rates encourage savers to do?
It would encourage them to increase their level of savings
What happens to the rate of investments if the rate of interest falls?
The rate of investments increase
Why does a fall in interest rates lead to an increase in investment rates?
Because of a fall in interest rates, it means the cost of borrowing has gone down, so it is cheaper to borrow money for investments, but also there is lower opportunity cost involved in sacrificing saving.
