Financial Markets Flashcards
What is the role of the financial sector
Connect savings and investment between households and firms in the circular flow of income
What are the 3 different types of financial markets
1) Money market
2) Capital market
3) Foreign Exchange market
What is the role of the money market
Provision of short term finance to borrowers (1 day to a year)
What is the role of the capital market
Provision of medium - long term finance to borrowers (anything over a year)
What is the role of the foreign exchange market
Market where one currency is exchanged for another currency
What is debt
Money that has
to be paid back in a certain amount of time alongside a specified interest rate
What is equity
When a firm receives money with no repayment schedule or interest rates, but in exchange for a stake in the firm. Done through the stock exchange.
What are the functions of money
1) to act as a medium of exchange
2) To be a reliable store of value
3) Act as a unit of account (to easily value goods and services)
What does an asset have to be in order to fulfill the functions of money
1) durable
2) divisible
3) portable
4) Limited supply but enough to supply a growing economy
5) Difficult to forge
What are examples of assets that fulfill the functions of money
Cash
Bank current accounts
Bank savings accounts
What is money supply
The total value of both cash and bank accounts. (cash makes up a tiny %)
What is the difference between narrow money and broad money
- narrow is the amount cash in the system
- Broad is all types of money
How does the money supply expand to meet increased demand during economic growth
Banks can create new money (called credit creation)
Who controls credit creation and why is it important to control
Government
- Is important because they need more credit creation in a strong growing economy
- less in a recession (credit crunch e.g. 2008)
