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Economics > Chapter 12 > Flashcards

Chapter 12 Flashcards

1
Q

Define asset

A

Things people own

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2
Q

Define liability

A

Things people owe

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3
Q

Define money (2 definitions)

A
  • Exchange(payment)

- Store of wealth

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4
Q

The way in which money developed

A
  • Bartering
  • Commodity (shells, beads etc)
  • Representative (Banknotes backed by gold)
  • Token money (cash physical or deposits)
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5
Q

Define money supply

A

Stock of financial assets which function as money

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6
Q

Two types of money supply

A

Narrow money : cash and liquid money

Broad money : cash and liquid and illiquid assets

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7
Q

Define liquidity (money)

A

Ease of which an asset can be converted into cash without loss of value

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8
Q

Define equity and debt

A

Equity: assets people own
Debt: people’s liabilities

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9
Q

Define share

A

Part of a company, initially sold by a company to raise financial capital

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10
Q

Define bond

A

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

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11
Q

What is a financial market

A

Markets in which financial assets or securities are traded

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12
Q

Why is a security called a security

A

Because it secures a claim against someone or an institution

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13
Q

Three types of financial markets

A

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

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14
Q

Difference between a corporate and government bond

A

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

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15
Q

What is debt security known as in the UK

A

Gilt edged securities or gilt

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16
Q

Why is there an inverse relationship with interest rates and bond prices

A

Because price of bond rises the bonds yield falls)

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17
Q

Define maturity date

A

The date at which the issuer of dated security pays the face value

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18
Q

Two kinds of capital markets

A

New issues

Second hand market (London stock exchange)

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19
Q

Define commercial bank

A

Retail bank which aims to make profits by selling banking services to its customers

  • Accepts deposits from public
  • Create deposits lend to customers
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20
Q

Define Investment bank

A

Work with companies, help companies buy other companies

21
Q

What is the issue regarding systematic risk with investment banks

A

Risk of breakdown of the entire financial system due to interlinkages

22
Q

How monopoly banks create credit

A

10% of people’s deposits are backed up with cash

  • Only one bank
  • Possesses only one reserve of cash
23
Q

How multi banking systems create credit

A

If banks are willing to exchange between each other more is able to be created

24
Q

What is the liquidity profitability trade off

A

Profits are traded off as there must be a liquid reserve

25
Q

Banks must provide secured loans because…

A

People may default so bank loses money

26
Q

Define central bank

A

National bank providing financial and banking services for its country’s government and banking system

27
Q

What are the two main functions of the bank of england

A
  • Help gov maintain macroeconomic stability

- bring about financial stability

28
Q

Financial stability can be achieved how through the central bank

A
  • Lender of last resort to banking system

- Controlling note issue

29
Q

Difference between policy objective and policy instrument

A

Objective- target that BoE aims to hit

Instrument- tool of control to achieve this

30
Q

What is the MPC

A

Part of BoE implements UK monetary policy

31
Q

What is the bank rate

A

Rate of interest the bank of england pays to commercial banks on their deposits held at the bank of england

32
Q

Define contractionary monetary policy

A

Interest rates increased to decrease demand in the economy

33
Q

Why does an increase in interest rates decrease aggregate demand

A
  • 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
34
Q

Define expansionary monetary policy

A

Lower interest rates to increase AD

35
Q

Draw reduction interest rates effect on AD

A

…

36
Q

What does a change in bank rate ultimately cause

A

Inflation

37
Q

What happens if bank rate falls

A

Asset prices rise and people feel wealthier and more confident about the future

38
Q

What is the time lag between bank rate change and inflation

A

2 years

39
Q

Describe quantitative easing

A

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

40
Q

What is forward guidance

A

Sending signals to financial markets, business and individuals about the BoE interest rate policy before it occurs so no shocks

41
Q

What happens with a falling exchange rate

A

Increases prices of imported goods, increasing rate of inflation. Cost push inflation
Demand pull inflation

42
Q

Define regulation

A

Imposing rules and laws on limiting freedom of individuals

43
Q

Define financial regulation

A

Limiting freedom of banks and other financial institutions

44
Q

What does the financial policy committee do

A

Identifying monitoring and taking action of systemic risks

45
Q

What does the prudential regulation authority do

A

Regulation and supervision of banks, building and societies

46
Q

What does the financial conduct authority do

A

Makes sure financial markets work well so consumers get a fair deal

47
Q

Equation of a banks capital

A

Assets- liabilities

48
Q

What is a moral hazard

A

Tendency of individuals and firms, once protected to act against some contingency

49
Q

What is the liquidity and capital ratio

A

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.

Economics (15 decks)

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