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Econ > 4.2.4 Financial markets and monetary policy > Flashcards

4.2.4 Financial markets and monetary policy Flashcards

1
Q

What are the 6 characteristics of money?

A
  • acceptable
  • portable
  • durable
  • divisible
  • limited
  • difficult to forge
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2
Q

What is the way of remembering the six characteristics of money?

A

Do Dragons Accept People Like Dave

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3
Q

What are the 4 key functions of money?

A
  • medium of exchange
  • store of value
  • unit of account
  • standard of deferred payment
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4
Q

What is meant by money being a medium of exchange?

A

money allows goods and services to be traded without the need for a barter system

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5
Q

What do barter systems rely on?

A

a double coincidence of wants

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6
Q

What is meant by money being a store of value?

A

its value can be retrieved at a later date (means people can save now to fund spending at a later date)

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7
Q

What is meant by money being a unit of account?

A

it means that the value of something can be expressed in an understandable way, and in a way that allows the value of items to be compared

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8
Q

What is the way of remembering the 4 functions of money?

A

Some Minions Use Swords

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9
Q

What is meant by money being a standard of deferred payment?

A

this refers to the expressing of the value of a debt

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10
Q

What is the money supply?

A

the total amount of money circulating in the economy

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11
Q

Define narrow money

A

refers to any physical money, demand deposits, and other liquid assets that are easily accessible to central banks

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12
Q

Define broad money

A

a category for measuring the amount of money circulating in an economy

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13
Q

What is a bond?

A

a fixed interest loan security

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14
Q

Define an asset

A

any resources owned by a business that can be used to produce positive economic value

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15
Q

What is a coupon?

A

the amount of money that is paid periodically, such as each year, as interest on a bond

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16
Q

What is the yield for a bond?

A

the rate of return on the bond if held to maturity

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17
Q

What is meant by equity in a company?

A

the value of the assets owned by the shareholders

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18
Q

Define liquidity

A

the degree to which an asset can be converted into money without capital loss and within a short space of time

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19
Q

Define the liquidity ratio

A

the ratio of a bank’s cash and other liquid assets, to its deposits

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20
Q

Define the capital ratio

A

the amount of capital as a proportion of its total assets (loans)

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21
Q

Define regulatory capture

A

when a regulatory agency, formed to act in the public’s interest, eventually acts in ways that benefit the industry it is supposed to be regulating, rather than the public

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22
Q

What are capital markets?

A

financial markets which provide long-term borrowing and lending, usually defined as over one year

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23
Q

Define a commercial bank

A

a bank that provides services to businesses

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24
Q

Define a financial market

A

any convenient set of arrangements where buyers and sellers can buy or trade a range of services or assets that are fundamentally monetary in nature

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25
Q

Give 3 financial markets that investment banks engage a range of activities in

A
  • foreign exchange market
  • money market
  • capital market
  • derivatives market
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26
Q

What is shadow banking?

A

parts of the financial market that are either much less regulated than the norm, or are completely unregulated

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27
Q

What is systemic risk?

A

(in the context of financial markets) the danger that failure of parts of the financial system will lead to the collapse of the whole financial system

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28
Q

What does FPC stand for?

A

Financial Policy Committee

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29
Q

What is the Financial Policy Committee a part of?

A

the Bank of England

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30
Q

What is the role of the Financial Policy Committee?

A

to identify, monitor, and take action to reduce or remove systemic risk in the UK financial system

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31
Q

What does PRA stand for?

A

Prudential Regulation Authority

32
Q

What is the Prudential Regulation Authority a part of?

A

the Bank of England

33
Q

What is the Prudential Regulation Authority responsible for?

A

the microprudential regulation and supervision of banks, building societies, insurers and other financial institutions

34
Q

What does FCA stand for?

A

Financial Conduct Authority

35
Q

What is the Financial Conduct Authority responsible for?

A

macroprudential regulation and ensuring the financial industry is run with integrity

36
Q

Define financial regulation

A

limiting the freedom of banks and other financial institutions (in order to maintain stability and integrity within the financial institution)

37
Q

When does moral hazard exist?

A

when a firm or individual pursues profit and takes on too much risk in the knowledge that, if things go wrong, someone else will bear a significant proportion of the cost

38
Q

What is meant by insolvent?

A

when the value of a bank’s assets falls below the level of its liabilities

39
Q

What is a balance sheet?

A

a statement of the assets, liabilities, and capital of a business or other organisation at a particular point in time

40
Q

What is the equation for equity?

A

assets - liabilities

41
Q

How is the net worth of a business calculated?

A

assets - liabilities

42
Q

Define a credit crunch

A

a sharp drop in confidence and thus a lack of credit

43
Q

Define the money market

A

financial markets that provide short-term borrowing and lending, usually defined as up to one year

44
Q

What is meant by a security?

A

secured loans, such as mortgage loans secured against the value of property

45
Q

Which are more risky: secured loans or unsecured loans?

A

unsecured loans

46
Q

What are the two sections of the capital market?

A
  • primary market
  • secondary market
47
Q

What is the difference between the primary market and the secondary market?

A
  • the primary market is where securities are created
  • the secondary market is where the securities are traded
48
Q

What is the fundamental role of the financial markets?

A

to ensure the smooth operation of capitalist economies

49
Q

What are the two sections of the foreign exchange market?

A
  • spot market
  • forward market
50
Q

What is the difference between the spot market and the forward market?

A
  • the spot market involves the immediate exchange of foreign currencies
  • the forward market involves the exchange of foreign currencies at some specified time in the future
51
Q

What is the foreign exchange market?

A

the market in which different currencies are bought and sold

52
Q

What is credit?

A

a form of deferred payment

53
Q

What is the 2 main objectives of a commercial bank?

A
  • to profit maximise
  • to respond to shareholders
54
Q

In relation to borrowing and lending, how does a commercial bank aim to profit maximise?

A
  • borrow short term
  • lend long term
55
Q

What is bank failure?

A

where a bank cannot meet its financial obligations to creditors and/or depositors

56
Q

Give 2 consequences of bank failure

A
  • systemic risk - effects rest of the financial system
  • recession - loss of jobs, income, output, etc
57
Q

Give 2 ways a bank can prevent bank failure

A
  • have enough liquidity to avoid a bank run
  • have security to manage risk and avoid insolvency
  • have a balanced portfolio of assets to mitigate risks that arise from a fall in one area
58
Q

What is a bank run?

A

when many clients simultaneously withdraw their money from a bank

59
Q

Why is a bank run likely to happen?

A

because clients have a lack of confidence in the bank’s ability to function (presently or in the near future)

60
Q

How does a commercial bank make a profit?

A

they ensure they charge a higher rate of interest on loans than they pay on deposits

61
Q

What is meant by share capital?

A

all the funds raised by a company in exchange for shares

62
Q

How do banks create credit?

A

by giving loans to their customers

63
Q

What are stress tests used for?

A

used to measure the extent to which financial institutions are vulnerable to the effects of extreme economic events

64
Q

What is the purpose of stress tests?

A

to lower systemic risk

65
Q

Give 3 ways in which a firm could raise finance

A
  • issuing shared
  • issuing corporate bonds
  • borrowing from a bank
66
Q

Define debt

A

the amount of money borrowed from one party to another

67
Q

What is the main risk that arises from commercial banks borrowing short-term and lending long-term?

A

Liquidity risk

68
Q

What is liquidity risk?

A

when a commercial bank may not be able to repay all of their deposits if savers decide to withdraw their funds

69
Q

Give 2 ways that a commercial bank reduce liquidity risk?

A
  • attract long-term deposits
  • hold some liquid assets as capital reserves
70
Q

Give 3 points that argue against financial market regulation

A
  • moral hazard
  • regulatory capture
  • high administration and enforcement costs
71
Q

Explain why financial market regulation may lead to greater moral hazard

A
  • interventions such as bank bailouts may cause commercial bankers to take more risks
  • as they know if the risks go bad, it is the third party (BoE, taxpayers) that have to bail the banks out
72
Q

Explain why regulatory capture is likely to occur as a result of financial market regulation

A
  • as the best regulators are usually the ones who have previously worked in the banking industry
  • but they may still have close relationships to CEOs and managers still in the industry
73
Q

What would it be called if the administration and enforcement costs of financial market regulation exceed to benefits?

A

government failure

74
Q

What are the 3 functions of a central bank?

A
  • monetary policy function
  • financial stability and regulatory function
  • policy operation functions
75
Q

What are the two sections of the ‘policy operation function’ for a central bank?

A
  • lender of last resort to the banking system
  • banker to the government
76
Q

What is another term for the bank rate?

A

the base rate (of interest)

Econ (12 decks)

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