Booklet 4 - Macro Flashcards
Definition - Barter
trading one good or service for another
Definition - commodity money
Commodities had an intrinsic value of their own but don’t require a double coincidence
Definition - representative money
Backed by gold held in a bank but may be represented by something else for security or portability
Definition - token money
Money bears no relation to anything of any intrinsic value, can no longer be exchanged for precious metal
Definition - narrow money
Money that can be used as a medium for exchange
Definition - broad money
Includes everything in narrow money but also assets that serve as stores of value but are too illiquid to serve as a medium of exchange
Definition - sight deposit
Money deposited with a financial institution that can be withdrawn at any time with no penalty
Definition - time deposits
Money deposited with a financial institution that can only be withdrawn after a certain notice period or from which withdrawal incur a penalty
Definition - liquidity
The ease with which an asset can be converted into cash without loss of value
Definition - asset
A thing someone owns which has a market value and can generate an income
Definition - liability
Something that is owed
characteristics of a money market
- provides short term borrowing
- matures in less than a year
- e.g. treasury and commercial bills
- promotes liquidity
Characteristics of a capital market
- trading in shares and bonds
- medium to long term borrowing
Definition - primary markets
For new issues or bonds newly issued by the government
Definition - secondary markets
Bonds and shares are resold second hand
Characteristics of a foreign exchange market
- trade in foreign currencies
- biggest financial market
Definition - spot markets
The exchange takes place immediately
Definition - forward markets
Exchange takes place in a time in the future
Definition - bills
Short term loans raised by the government (treasury) or firms (commercial)
- no interest
- sold at discount and redeemed at parity (what they are worth)
Definition - bonds / gilt
A form of long term borrowing with guaranteed annual interest
- either be corporate (firms) or government bond (gilt)
Yield calculation
Annual coupon divided current market price times by 100
Definition - central banks
A bank that acts as a national bank and provides services to the government and the banking system
- Bank of England
Definition - commercial banks
A financial institution which aims to make a profit by selling banking services to its customers
- NatWest
Definition - investment banks
A bank which doesn’t accept deposits from the public and offers advice and consultancy to help with stock market flotations
- JP Morgan
Objectives of a commercial bank
- profitability
- liquidity
- security - loans are secured against property
Definition - reserve requirement
Minimum proportion of deposits banks need to keep as cash
- 10%
Money multiplier calculation
1 over reserve requirement
Functions of the central bank
- help the give maintain macroeconomic stability
- bring about financial stability in the monetary system
- lender of last resort
- controlling the issue of notes
- acting as the bankers bank
- acting as the government bank
Definition - helicopter money
Giving money directly to citizens
Definition - forward guidance
An attempt to send signals to financial markets about the furture direction of conventional monetary policy to reduce uncertainty and can get the effect of interest rates sooner
Definition - quantitive easing
With permission from the treasury the Bank of England credits its own account with newly created money thus increasing the money supply
Fishers equation of exchange
MV=PQ
M - the money supply
V - velocity of circulation
P - the price level
Q - quantity of goods and services sold
Definition - macroprudential
Regulate the overall stability of the financial system and act to remove risk
Definition - microprudential
Regulate the overall stability of the a single financial institution and act to remove risk
Financial policy committee (FPC)
A macroprudential regulator
Prudential regulation authority (PRA)
Supervises individual banks by performing stress tests
- Microprudential regulator
Financial conduct authority (FCA)
Make sure financial markets work by promoting competition and protecting consumers
- microprudential regulator
Definition - stress test
Looks at an individual bank’s resilience to various adverse scenarios
Definition - run on the bank
A scenario where an unusually large number of people which you withdraw their deposits in response to panic
Definition - moral hazard
When a firm takes in too much risk while knowing that someone else will bear a significant portion of the cost
Definition - systemic risk
There is a risk posed to the whole financial system because of the connections between institutions and markets
Definition - capital ratio
measures how much of a banks funding has come in the form of equity
Definition - liquidity ratio
The ratio between the banks liquid assets and the expected outflows from the bank
