2.8 The role of money and financial markets

Question 1

What is money

Answer 1

Anything that is generally accepted as a medium of exchange for payment of goods and services

Question 2

What is an example of something that is not money

Answer 2

Cheques and debit and Credit cards

Question 3

What is a debit card

Answer 3

A card that allows you to take money directly from your current account and transfer it to the seller

Question 4

What is a credit card

Answer 4

A card that enables you to buy goods and services with money that is not yours. The money loaned must be payed back within 30 days. If you can’t pay it back, you are charged interest

Question 5

Why is money better than bartering

Answer 5

Bartering involves the necessity of a double coincidence of wants, which is rare

Question 6

What is a medium of exchange

Answer 6

Anything that sets the standard of value of goods and services acceptable to all parties involved in a transaction

Question 7

Financial sector

Answer 7

Consists of financial organisationsand their products and involves the flow of capital

Question 8

What is the role of the central bank (4)

Answer 8

• To issue bank notes
• To set the bank rate
• Acts as the bank for commercial bank
• Acts as the bank for the government

Question 9

Investment

Answer 9

The purchase of capital goods that are used to produce future goods ad services.
Also an asset purchased to provide an income in the future and/or to be sold as a profit

Question 10

interest rate

Answer 10

The cost of borrowing money
The reward for saving money

Question 11

What is the role of commercial banks (4)

Answer 11

• Accept deposits and pay interest on them
• Make payments to customers through checks, card payments and mobile payments
• Issue loans with a higher interest rate than what they offer in savings
• Offer safe deposit boxes for expensive items

Question 12

Building Society

Answer 12

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

Question 13

Mortgage

Answer 13

An agreement with a financial institution to borrow money to purchase a property

Question 14

Insurance company

Answer 14

Finanical institution that guarantees compensation for specified loss, damage, illness or death in return for an agreed premium

Question 15

What are the three main roles of the financial sector

Answer 15

Credit provision
Liquidity provision
Risk management

Question 16

What is credit provision

Answer 16

The availibility and allocation of borrowed funds in an economy

Question 17

What is liquidity provision

Answer 17

How easy it is to turn an asset into cash.
Banks are the main providers of liquidity provision

Question 18

What is risk management

Answer 18

Mitigating potential risks in an economic context, e.g. spreading out investments over a range of companies so if one does less well its fine

Question 19

How do interest rates affect the level of saving

Answer 19

Higher interest rates will mean more saving

Question 20

How do interest rates affect the level of borrowing

Answer 20

Lower interest rates will mean more borrowing

Question 21

How do interest rates affect the level of investments

Answer 21

Lower interest rates will increase firm’s investments.
However, if there is less confidence that demand for the product will rise, investment may not increase