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Macroeconomics > Chapter 12 > Flashcards

Chapter 12 Flashcards

1
Q

What are assets

A

Things which people or organisations own

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2
Q

What are liabilities

A

Things which people or organisations owe

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3
Q

What are money

A

Which primarily a medium of exchange or means of payment but also a store of value

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4
Q

What is the money supply

A

The stock of financial assets which function as money

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5
Q

What is narrow money

A

The part of the stock of money made up of cash and liquid bank and building society deposits

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6
Q

What is broad money

A

The part of the stock of money made up of cash, other liquid assets such as bank and building society deposits., but also some illiquid assets.

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7
Q

What is liquidity

A

Measures the ease with which an asset can be converted into cash without loss of value. Cash is the most liquid of all assets

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8
Q

What are shares

A

Undated financial assets sold initially by a company to raise financial capital. Shares sold by public companies or PLCs are marketable on a stock exchange, but shares sold by private companies are not marketable. Unlike a loan, a share signifies that the holders owns part of the enterprise.

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9
Q

What are bonds

A

Do I axial securities sold by companies that r by governments which are a form of long term borrowing. Bonds usually have a maturity date on which they are redeemed with the borrower usually making a fixed interest payment each year until the bond matured

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10
Q

What is equity

A

The assets which people own

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11
Q

What is debt

A

People’s financial liabilities or money they owe

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12
Q

What are financial markets

A

Markets in which financial assets or securities are traded

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13
Q

What are money markets

A

Provides a means for lenders and borrowers to satisfy their short term financial needs. Assets that are bought and sold on money markets are short term with maturities ranging from a day to a year and are normally easily convertible into cash .

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14
Q

What are capital markets

A

Where securities such as shares and bonds are issued to raise medium to long term financing and where shares and bonds are then traded on the second hand part of the market

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15
Q

What are foreign exchange markets

A

Global decentralised markets for the trading of currencies. The main participants in this market are large international commercial banks. Collectively foreign exchange markets are the largest markets in the global economy

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16
Q

What are corporate bonds

A

Debt security issued by a company and sold as new issues to people who lend long term to the company. They can usually be resold second hand on a stock exchange

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17
Q

What are government bonds

A

Debt security in the UK known as gilt edged securities or gilts issued by a government and sold as new issues to people who lend long term to the government. They can be resold second hand on a stock exchange.

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18
Q

What is a coupon

A

The guaranteed fixed annual interest payment, often divided into two 6 month payments paid by the issuer of a bond to the owner of the bond

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19
Q

What is maturity date

A

The date on which the issuer of a dated security such as a gilt edged security or a treasury bill pays face value of the security to the security’s owner

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20
Q

What is a commercial bank

A

A financial institution which aims to make profits by selling banking services to its customers

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21
Q

What is an investment bank

A

A bank which does not generally accept deposits from ordinary members of the general public. Traditional investment banking refers to financial advisory work such as advising private companies on how to become a public company by floating on the stock market or advising public companies on how to buy up another company m.

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22
Q

What is a systemic risk

A

In a financial context this refers to the risk of a breakdown of the entire financial system, cause by inter- linkages within the financial system rather than simply the failure of an individual bank or financial institution within the system.

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23
Q

What is credit

A

When a bank makes a loan it creates credit. The loan results in the creation of an advance which is an asset on the banks balance sheet and a deposit which is a liability of the bank

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24
Q

What is profitability

A

The state or condition of yielding a financial profit or gain

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25
Q

What is security

A

Secured loaned such as mortgage loans secured against the value of property are less risky for banks than unsecured Loans

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26
Q

What is a central bank

A

A national bank that provides financial and banking services for its country’s government and banking system as wells as implementing the governments monetary policy and issuing currency.

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27
Q

What is the monetary policy committee

A

The part of the Bank of England which implements Uk monetary policy. The Uk government sets the monetary policy objectives or targets which the MPC then implementing monetary policy to try to hit the targets

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28
Q

What are monetary policy instruments

A

Tools such as the bank rate which are used to try to achieve monetary policy objectives

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29
Q

What is the bank rate

A

The rate of interest that the Bank of England pays to commercial banks on their deposits held at the Bank of England

30
Q

What is contractionary monetary policy

A

Uses higher interest rates to decrease aggregate demand and to shift the Ad curve to the left

31
Q

What is the exchange rate

A

The external price of a currency, usually measured against another currency

32
Q

What is expansionary monetary policy

A

Uses lower interest rates to increase aggregate demand and to shift the AD curve to the right

33
Q

What is quantitative easing

A

When the Bank of England buys assets, usually government bonds with money that the bank has created electronically

34
Q

What is forward guidance

A

Attempts to send signals to financial markets, businesses and individuals about the Bank of England’s interest rate policy in the months and years ahead so that economic agents are not surprised by a sudden and unexpected change in policy

35
Q

What is the financial policy committee

A

The part of the Bank of England charged with the primary objective of identifying, monitoring and taking action to remove or reduce systemic risks with a view to protecting and enhancing the resilience of the Uk financial system. The committees secondary objective is to support the economic policy of the government

36
Q

What is the prudential regulation authority

A

The part of the Bank of England responsible for the micro prudential regulation and supervision of banks, building societies, credit unions, insurers and major investment firms

37
Q

What is the financial conduct authority

A

Aims to make sure that financial markets work well so that consumers get a fair deal, by ensuring that the financial industry is run with integrity and that consumers can trust that firms have their best interests at heart and by providing consumers with appropriate financial products and services

38
Q

What is a moral hazard

A

The tendency of individuals and firms once protected against some contingency to behave so as to make that contingency more likely

39
Q

What is the liquidity ratio

A

The ratio of banks cash and other liquid assets to its deposits

40
Q

What is the capital ratio

A

The amount of capital on a banks balance sheet as a proportion to its loans

41
Q

What are the functions of money

A

A medium of exchange or means of payment

A store of value or store of wealth

42
Q

What are the characteristics of money?

A
  • commodity money
  • representative money
  • token money
  • money supply
  • narrow money and broad money
43
Q

What is commodity money?

A

earliest form of money was commodity money
Commodities that functioned as money had an intrinsic value of their own: they yielded utility and consumer services to their owners
decorartive payment e.g beads
Cattle could be slaughtered and eaten

44
Q

What is representative money?

A

Goldsmiths developed into banks and the receipts they issued in return for deposits of gold became the first banknotes or paper money. These notes were representative moeny

45
Q

What is token money?

A

-no intrinsic value of its own. It takes two main forms: cash and bank deposits

46
Q

What are money’s other functions?

A
  • a measure of value

- a standard of deferred payment

47
Q

What happened from mid 70s to 80s during the monetarist era?

A

control of the money supply became an important part of monetarist economic management in general and monetary policy in particular
During this period monetarist economists devoted considerable attention to the problem of deciding which assets to include and exclude when defining the money supply

48
Q

Why is a security so called?

A

Because it secures a claim against a person or institution for example a share secures ownership of a fraction of the company which initially sold the share to the general public

49
Q

What are Uk money markets?

A

provide mechanisms for banks to arrange their assets in terms of their liquidity or profitability with highly liquid assets such as treasury and commercial bills at the liquid end of the spectrum

50
Q

What are the UK capital markets?

A

include the London stock exchange provide the mechanism through which public limited companies can raise the funds to finance their long term growth

51
Q

What is a bond market?

A

perform a critical role in government finance for example by enabling the government to finance a budget deficit

52
Q

Capital markets are made up of what two parts?

A

new issues market

second hand market

53
Q

What are some examples of financial markets ?

A

money markets
capital markets
foreign exchange markets

54
Q

Commercial banks are commercially-run financial institutions that:

A
  • accept deposits from the general public

- create deposits which are lent to customers who wish to borrow

55
Q

What do investment banks do?

A

help companies, other financial institutions and other organisations to raise finance by selling shares or bonds to investors and to hedge against risks
-also trade on their own behalf in shares, bonds and other financial assets

56
Q

distinguish between systemic risk and one off risk?

A

systemic risk affects the entire banking system and other financial institutions as well
consequences of a systemic financial crisis can be devasting because of the role that banks and finance play in the wider economy

57
Q

What is the liquidity profitability trade off?

A

cash acts as high powered money which allows the banks to make advances to customers creating deposits and increasing the total stock of money
imprudent or greedy banks could be tempted to create far too many profitable advances , these banks would be operating on low ratio of cash and other liquid assets to the advances they have created. A run on the bank would cause a crash

58
Q

What are the centrals bank two main functions?

A

to help the government maintain microeconomic stability and to bring about financial stability in the monetary system

59
Q

How is price stability remit defined?

A

Governements inflation target currently 2% on the consumers price index

60
Q

How does the central bank help financial stability to be acheived?

A

acting as a lender of last resort to the banking system

monitoring and regulating the financial system

61
Q

How can monetary policy instruments and objectives be classified?

A

policy objectives can be divided into ultimate and intermediate ojectives
policy instruments separate into those that directly affect the supply of new deposits that the commercial banks can create and those that influence the creation of bank deposits by affecting the demand for loans or credit

62
Q

explain the monetary policy objectives and the role of the MPC

A

control of inflation has been the main objective of UK monetary policy
needs to be controlled so the ultimate policy objective of improved economic welfare can be attained

63
Q

explain the monetary policy instruments and the role of the MPC

A

can involve the Bank of England taking action to influence interest rates, the supply of money and credit and the exchange rate

64
Q

What part of aggregate demand does monetary policy affect?

A

consumption, investment, exports and imports

65
Q

What factors have to be considered by the monetary policy committee when setting the bank rate?

A

Takes account of the current inflation rate, the existence of inflationary or deflationary pressure on consumer and business confidence, the economy’s growth rate, the levels of employment and unemployment and a number of other economic indicators

66
Q

What happens with contractionary monetary policy?

A

interest rates are increased so as to take the demand out of the economy

  • the extent to which the price level then falls depends on the shape of the economy’s SRAS curve
  • there is a possibility that a contractionary monetary policy which aims to control the level of inflation can cause the economy to sink into recession , especially likely if CMP triggers a large multiplier effect that shifts the AD curve even further to the left
67
Q

What are the three main ways in which an increase in interest rates decrease aggregate demand?

A
  • higher interest rates reduce household consumption
  • higher interest rates reduce business investment
  • changes in interest rates affect imports and exports via the exchange rate
68
Q

How do higher interest rates reduce household consumption?

A

encourage people to save, higher savings mean less income is available for consumption
the cost of household borrowing increases which increases the cost of servicing a mortgage and credit card debt
higher interest rates cause asset prices to rise such as the prices of houses and shares to fall
falling house prices and share prices reduce consumer confidence further deflates consumption

69
Q

why do higher interest rates reduce business investment?

A

businesses postpone or cancel investment as the higher borrowing costs make the purchase unprofitable, likely to be exacerbated by a fall in the business confidence and increased business pessimism

70
Q

What is the effect of expansionary monetary policy?

A

A bank rate cut discourages saving while stimulating borrowing, consumption and investment spending, exports also increase
The AD curve shifts to the right with the extent of the shift depending on the size of the multiplier
-the increasing steepness of the SRAS curve as normal capacity utilisation approaches means that the stimulation of real outpt=ut gives way to price inflation

71
Q

How does an increase in interest rates affect exports and imports via the exchange rate

A

-a higher interest rate increases the demand for pounds by attracting capital flows into the currency, the increased demand causes the exchange rate to rise which makes UK exports less price competitive and imports more competitive
UK’s current account on the balance of payments worsens which shifts the AD curve leftward

72
Q

How does a decrease in interest rates affect exports and imports via the exchange rate?

A
  • triggers capital outflow in the balance of payments, and the resulting increase in the supply of pounds on the foreign market leads to a fall in the exchange rate
  • exports become more price competitive and the current account on the balance of payments improves. AD increases

Macroeconomics (7 decks)

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