Factors Affecting Demand for Funds Flashcards
What is liquidity?
The ease with which a financial asset can be transformed into cash so it can be used as a medium of exchange.
What is the benefit of holding money.
Liquidity - lower costs of transactions, and no risk of capital losses.
What are the main benefits and disadvantages of owning financial assets?
Financial assets provide returns by holding them, but they are risky as their value can change due to the market.
What are the three main motives for holding liquid funds?
Transactionary
Precautionary
Speculative
Describe the transactionary motive for holding liquid funds.
Individuals may hold a certain amount of liquid funds to fulfil all their day-to-day transactions.
Describe the precautionary motive for holding liquid funds.
People may hold liquid funds in case an emergency situation arises (eg sickness) where they need it.
Describe the speculative motive for holding liquid funds.
If individuals speculate that they will have capital losses on an asset, they will seek to sell their assets and convert them to liquid funds.
What are other factors that affect the demand for liquid funds?
The sophistication of the financial system, the ease of converting non-liquid funds into cash.
What has been the effect of advanced financial systems on the demand for liquid funds?
The enhanced operation of financial markets means that people find it easier to convert assets to liquid funds, which reduces the demand for liquidity.
What is the mina opportunity cost of holding liquid funds?
The forgone returns that would have been earned by holding financial assets.
In what situation will individuals hold money rather than financial assets?
When the benefit of holding liquidity outweighs the costs.
What are the factors that affect the demand for funds from businesses?
Cash flow compared to expenses
Economic conditions
Interest rates
What are some technological innovations in financial markets?
ATMs, EFTPOS, online banking and payment systems, internet stockbrokers, buy now pay later, mortgage brokers
What has been the effect of technological innovation in financial markets?
These have meant people don’t need to hold high volumes of liquid funds to cover daily transactions.
What has been the effect of internet based stockbrokers?
They have brought down the cost of trading shares and have made it much easier for individual investors to participate in financial markets.
