4.2.2 financial markets and monetary policy Flashcards
characteristics of money
medium of exchange
unit of account
store of value
standard of deferred payment
portable
durable
scarce
difficult to forge
functions of money
facilitate exchange: eases exchange of goods and services
unit of measurement: common unit, simplifies transactions
store of value: save and transfer wealth across time
standard for debt settlement: fulfill financial commitments
what is the money supply
stock of currency and liquid assets in an economy including money within savings accounts
narrow money
M1
physical currency eg notes and coins
as well as deposits and liquid assetts in the central bank
can be converted to cash at any time (eg demand deposits)
broad money
includes entire money supply, incorporates iliquid assets
eg savings account or time deposits
money market
liquid assets are traded
used to borrow and lend in the short term
capital market
equity and debt instruments are bought and sold which can be put into long term productive use by firms or the government
foreign exchange market
currencies are traded mainly by international banks
determines relative value of the currency
financial liquid assetts
exchanged in financial markets
eg stocks and bonds
role of financial markets in the wider economy
facilitate saving: consumers or firms store funds
lending: transfer of funds between agents is aided
facilitate exchange of goods or services: provides a way buyers and sellers can interact and exchange funds
provides a forward/ futures market: for currencies or commodities
provides market for equities: access to capital form firms, returns on investment (dividends) are based on future performance
forward market
informal financial markets where these contracts for future delivery are made
debt
money which has been borrowed from a lender (usually a bank), little flexibility as the loan is later repaid with interest
equity
stock or security which represents interest in owning, no outstanding debt
eg when mortgage is fully paid off, the equity in the house can then be sold for cash
market interest rates and bond prices
inverse relationship
interest rate is fixed once the bond is issued
new bonds have rates close to the market IR
market IR rises, less demand for old bonds, bond price falls
how firms raise finance
Shares: relatively cheap for firms, only pay dividends when there are distributeable profits and its voted for by shareholders
Borrowing: involves high interest rates which is expensive however they can easily adjust amount their borrowing
Corporate bonds: issued to raise funds for large projects, partially protected against variable interest rates or economic changes
