4.12.1 - The Structure of Financial Markets and Financial Assets Flashcards
What are assets?
Things which people or organisations own.
What are liabilities?
Things which people or organisations owe.
What does money function as?
A medium of exchange or means of payment
A store of value or wealth
A measure of value
A standard of deferred payment
What are the three main forms of money?
- Commodity
- Representative
- Token
What is commodity money?
Commodities that functioned as money had an intrinsic value of their own, as they yielded utility and/or services to their owners.
i.e. rice, wheat, beads etc.
What is representative money?
Gold and silver was deposited with goldsmiths for safekeeping, and the goldsmiths would issue notes that could be exchanged for silver/gold on demand.
This is representative money.
What are the characteristics for money to possess?
- Relative scarcity
- Uniformity
- Durability
- Portability
- Divisibility
What is token money?
Money that holds no intrinsic value of its own.
Takes two main forms: cash and bank deposits.
What does money being the primary unit of value allow people to do?
More accurately compare the prices of goods even when there is no intention of spending money.
What is the money supply?
The stock of financial assets which function as money.
When did people begin paying attention to the money supply in the economy?
In the 1970s when monetarism became the prevailing economic view.
What is narrow money?
The part of the stock of money made up of cash and liquid bank and building society deposits.
What is broad money?
The part of the stock of money made up of cash, other liquid assets such as bank and building society deposits, but also some illiquid assets.
The measure of broad money used by the BoE is called M4.
Essentially, money in any form of cash or other assets that are easily liquidified.
What is liquidity?
Measures the ease with which an asset can be converted to cash without a loss of value.
Cash is the most liquid of all assets.
What is Goodhart’s Law?
As soon as the government tries to control the money supply, other financial assets, previously regarded as ‘near money’ outside the current system of control will take on the function of money.
What are shares?
Undated financial assets, sold initially by a company to raise financial capital. Shares sold by public companies or PLCs are marketable on a stock exchange, but shares sold by private companies are not marketable. Unlike a loan, a share signifies that the holder owns part of the enterprise.
What are bonds?
Financial securities sold by companies or by governments which are a form of long-term borrowing. Bonds usually have a maturity date on which they are redeemed, with the borrower usually making a fixed interest payment each year until the bond matures.
What is equity?
The assets which people own.
What is debt?
People’s financial liabilities or money they owe.
What is a wealth portfolio?
The different wealth assets that an individual owns and holds at a particular point in time.
What is a portfolio balance decision?
Makes the distinction between physical and financial assets, and arranges financial assets according to liquidity and profitability.
What are financial markets?
Markets in which financial assets or securities are traded.
What is a money market?
Markets that buy and sell assets that have short term maturities (day or a year) that can be converted to cash easily.
What is a foreign exchange market?
Global, decentralised markets for the trading of currencies.
