2.8 The Role of Money and Financial Markets Flashcards
What is money?
Anything that is acceptable as a means of payment for goods and services.
What does money consist of?
- Bank notes
- Coins
- Savings accounts
- Current accounts
What is not considered to be money, but allow money to be transferred between buyers and sellers?
- Debit cards
- Credit cards
- Cheques
What is meant by medium of exchange?
Anything that sets the standard of value of goods and services acceptable to all parties involved in a transaction. Eg: money.
What is a debit card?
Transfers money from your current account to the seller. If you do not have enough money in your account, you can’t purchase the product.
What is a credit card?
This enables you to buy goods and services whether or not you have money in your account. If you cannot pay this short term loan back within 30 days you are charged interest on it.
What is the financial sector?
Consists of financial organisations and their products. Also involves the flow of capital.
What is the role of the financial sector?
It helps markets to function by helping consumers, firms and governments carry out economic activities.
This normally involves the lending and borrowing of money between people who don’t need to use their money now (savers) and those who need it now (borrowers).
What are banks?
They are financial institutions licensed to receive deposits and make loans.
What are three examples of commercial banks?
- Barclays
- HSBC
- Santander
What are 5 roles of commercial banks?
- Make payments on customer’s behalf
- Issue loans to individuals/firms
- Offer safe deposit boxes
- Provide currency exchange
- Accept deposits (savings) and pay interest on them
What are 5 things the Central bank does?
- Issue bank notes, controlling the supply of money
- Control monetary policy by setting the bank rate which determines interest rates for commercial banks
- Provides financial stability
- Manage the country’s foreign reserves
- Act as a bank for commercial banks and the government
Who are commercial banks owned by?
Since they are PLCs (public limited companies) they are owned by shareholders. They are paid dividends which are a percentage share of the company’s profits every quarter year.
What are building societies?
They are mutual financial organisations owned by their members.
What is the role of building societies?
- Provide services such as savings and mortgages
- They can only borrow limited amounts of money from the market, unlike banks
What are insurance companies?
They are financial institutions that guarantee compensation for specific loss, damage, death etc in return for monthly or yearly payments.
What can insurance companies provide?
- Life insurance that pays out money to surviving family, intended to replace loss of income due to death
- General insurance for non-life aspects such as property
Why is credit provision important to consumers and producers?
It is important to consumers because they can buy now and pay later, increasing consumption.
Producers can use credit to borrow money to expand their company.
Why is credit provision important to the government?
Governments use credit to enable them to spend before tax revenue is collected or to run a budget deficit.
What does liquidity mean?
Liquidity refers to how quickly assets can be turned into cash.
Why is liquidity provision
important to consumers?
It is important as they can borrow money now and pay later, often against an asset like a house.
Why is liquidity provision
important to producers?
This means that banks are able to provide overdraft facilities (when there isn’t enough money in your account for a transaction) so firms can continue trading while waiting for their revenue.
Why is risk management
important to consumers?
It allows savers to spread their risk by putting their money into a range of companies, rather than one.
Why is risk management
important to producers?
This reduces the risk of not receiving payment, especially when there are delays with exporting.
Why is risk management
important to the government?
This allows for vital expenditure, even when government revenue is uncertain.
What is saving?
Is the part of an individual’s income which is not spent on consumption.
What is borrowing?
Is receiving money (or something of value) in exchange for an obligation to pay it back in the future.
What is investment?
For firms, the purchase of capital goods that are used to produce future goods and services.
It can also be an asset purchased to provide an income in the future and/or to be sold at a profit.
How do interest rates affect the level of saving?
In general, higher interest rates will attract savers and vice versa. The opportunity cost of spending is the loss of interest payable on savings.
How do interest rates affect the level of borrowing?
A rise in the rate of interest will increase the cost of borrowing. This rise will cause consumers to borrow less (as it is more expensive to pay back) and save more. Firms will also borrow and sell less due to exports costing more.
How do interest rates affect the level of investment for consumers?
The level of investment is inversely proportional to the interest rate. Consumer investment will increase if interest rates are low because there is a lower opportunity cost involved in sacrificing saving.
Moreover, investment requires borrowing, so if interest rates are high then fewer people will borrow.
How do interest rates affect the level of investment for producers?
Lower interest rates encourage consumer spending, so firms will need to expand and thus invest more.
However, if consumers lack confidence in the economy, the demand for products may not increase and therefore investment for expanding the firm will not be required.
How do you calculate the effect of changes in interest rates on saving/borrowing?
Amount saved/borrowed × (interest rate ÷ 100)
