Chapter 12 Flashcards
Define asset
Things people own
Define liability
Things people owe
Define money (2 definitions)
- Exchange(payment)
- Store of wealth
The way in which money developed
- Bartering
- Commodity (shells, beads etc)
- Representative (Banknotes backed by gold)
- Token money (cash physical or deposits)
Define money supply
Stock of financial assets which function as money
Two types of money supply
Narrow money : cash and liquid money
Broad money : cash and liquid and illiquid assets
Define liquidity (money)
Ease of which an asset can be converted into cash without loss of value
Define equity and debt
Equity: assets people own
Debt: people’s liabilities
Define share
Part of a company, initially sold by a company to raise financial capital
Define bond
Financial securities sold by companies or governments, with maturity dates (from when they are redeemed) with a fixed interest pay each year until the bonds mature
What is a financial market
Markets in which financial assets or securities are traded
Why is a security called a security
Because it secures a claim against someone or an institution
Three types of financial markets
Money markets- short term financial needs
Capital markets- long terms selling shares and bored to raise long term financing
Foreign exchange market- global market for trading currencies
Difference between a corporate and government bond
Corporate- debt securities issued by company and sold as new issues to people who lend long term to company
Gov- debt securities issued by gov and sold as new issues to people who lend long term to gov
What is debt security known as in the UK
Gilt edged securities or gilt
Why is there an inverse relationship with interest rates and bond prices
Because price of bond rises the bonds yield falls)
Define maturity date
The date at which the issuer of dated security pays the face value
Two kinds of capital markets
New issues
Second hand market (London stock exchange)
Define commercial bank
Retail bank which aims to make profits by selling banking services to its customers
- Accepts deposits from public
- Create deposits lend to customers
Define Investment bank
Work with companies, help companies buy other companies
What is the issue regarding systematic risk with investment banks
Risk of breakdown of the entire financial system due to interlinkages
How monopoly banks create credit
10% of people’s deposits are backed up with cash
- Only one bank
- Possesses only one reserve of cash
How multi banking systems create credit
If banks are willing to exchange between each other more is able to be created
What is the liquidity profitability trade off
Profits are traded off as there must be a liquid reserve
Banks must provide secured loans because…
People may default so bank loses money
Define central bank
National bank providing financial and banking services for its country’s government and banking system
What are the two main functions of the bank of england
- Help gov maintain macroeconomic stability
- bring about financial stability
Financial stability can be achieved how through the central bank
- Lender of last resort to banking system
- Controlling note issue
Difference between policy objective and policy instrument
Objective- target that BoE aims to hit
Instrument- tool of control to achieve this
What is the MPC
Part of BoE implements UK monetary policy
What is the bank rate
Rate of interest the bank of england pays to commercial banks on their deposits held at the bank of england
Define contractionary monetary policy
Interest rates increased to decrease demand in the economy
Why does an increase in interest rates decrease aggregate demand
- Less consumption , borrowers also have less money to spending
- Reduction in business investment (capital is unprofitable)
- High interest rates, cause higher demand for pound so exchange rate rises and exports from UK less price competitive. AD decreases
- Low interest rate, less demand AD increases
Define expansionary monetary policy
Lower interest rates to increase AD
Draw reduction interest rates effect on AD
…
What does a change in bank rate ultimately cause
Inflation
What happens if bank rate falls
Asset prices rise and people feel wealthier and more confident about the future
What is the time lag between bank rate change and inflation
2 years
Describe quantitative easing
Bank of england buys assets usually gov bonds, with money that the Bank has created electronically.
Hope of selling these bonds to BoE and lend the newly created money to individuals
What is forward guidance
Sending signals to financial markets, business and individuals about the BoE interest rate policy before it occurs so no shocks
What happens with a falling exchange rate
Increases prices of imported goods, increasing rate of inflation. Cost push inflation
Demand pull inflation
Define regulation
Imposing rules and laws on limiting freedom of individuals
Define financial regulation
Limiting freedom of banks and other financial institutions
What does the financial policy committee do
Identifying monitoring and taking action of systemic risks
What does the prudential regulation authority do
Regulation and supervision of banks, building and societies
What does the financial conduct authority do
Makes sure financial markets work well so consumers get a fair deal
Equation of a banks capital
Assets- liabilities
What is a moral hazard
Tendency of individuals and firms, once protected to act against some contingency
What is the liquidity and capital ratio
Liquidity/ ratio of banks cash and other liquid deposits
Capital/ amount of capital on a banks balance sheet as a proportion of its loans a.
