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AQA A-Level Economics Year 2 > Financial Markets > Flashcards

Financial Markets Flashcards

1
Q

What are the 6 characteristics of money?

A

Acceptable
Portable
Durable
Divisible
Limited
Difficult to forge

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2
Q

What is the way of remembering the six characteristics of money?

A

Do Dragons Accept People Like Dave

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3
Q

What are the 4 key functions of money?

A

Medium of exchange
Store of value
Unit of account
Standard of deferred payment

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4
Q

What is meant by money being a medium of exchange?

A

Money allows goods and services to be traded without the need for a barter system

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5
Q

What do barter systems rely on?

A

A double coincidence of wants

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6
Q

What is meant by money being a store of value?

A

Its value can be retrieved at a later date (means people can save now to fund spending at a later date)

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7
Q

What is meant by money being a unit of account?

A

It means that the value of something can be expressed in an understandable way, and in a way that allows the value of items to be compared

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8
Q

What is the way of remembering the 4 functions of money?

A

Some Minions Use Swords

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9
Q

What is meant by money being a standard of deferred payment?

A

This refers to the expressing of the value of a debt

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10
Q

What is the money supply?

A

The total amount of money circulating in the economy

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11
Q

Define narrow money

A

Refers to any physical money, demand deposits, and other liquid assets that are easily accessible to central banks

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12
Q

Define broad money

A

A category for measuring the amount of money circulating in an economy

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13
Q

What is a bond?

A

A fixed interest loan security

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14
Q

Define an asset

A

Any resources owned by a business that can be used to produce positive economic value

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15
Q

What is a coupon?

A

The amount of money that is paid periodically, such as each year, as interest on a bond

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16
Q

What is the yield for a bond?

A

The rate of return on the bond if held to maturity

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17
Q

What is meant by equity in a company?

A

The value of the assets owned by the shareholders

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18
Q

Define liquidity

A

The degree to which an asset can be converted into money without capital loss and within a short space of time

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19
Q

Define the liquidity ratio

A

The ratio of a bank’s cash and other liquid assets, to its deposits

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20
Q

Define the capital ratio

A

The amount of capital as a proportion of its total assets (loans)

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21
Q

Define regulatory capture

A

When a regulatory agency, formed to act in the public’s interest, eventually acts in ways that benefit the industry it is supposed to be regulating, rather than the public

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22
Q

What are capital markets?

A

Financial markets which provide long-term borrowing and lending, usually defined as over one year

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23
Q

Define a commercial bank

A

A bank that provides services to businesses

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24
Q

Define a financial market

A

Any convenient set of arrangements where buyers and sellers can buy or trade a range of services or assets that are fundamentally monetary in nature

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25
Q

Give 3 financial markets that investment banks engage a range of activities in

A

Foreign exchange market
Money market
Capital market
Derivatives market

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26
Q

What is shadow banking?

A

Parts of the financial market that are either much less regulated than the norm, or are completely unregulated

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27
Q

What is systemic risk?

A

The danger that failure of parts of the financial system will lead to the collapse of the whole financial system

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28
Q

What does FPC stand for?

A

Financial Policy Committee

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29
Q

What is the Financial Policy Committee a part of?

A

The Bank of England

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30
Q

What is the role of the Financial Policy Committee?

A

To identify, monitor, and take action to reduce or remove systemic risk in the UK financial system

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31
Q

What does PRA stand for?

A

Prudential Regulation Authority

32
Q

What is the Prudential Regulation Authority a part of?

A

The Bank of England

33
Q

What is the Prudential Regulation Authority responsible for?

A

The microprudential regulation and supervision of banks, building societies, insurers and other financial institutions

34
Q

What does FCA stand for?

A

Financial Conduct Authority

35
Q

What is the Financial Conduct Authority responsible for?

A

Macroprudential regulation and ensuring the financial industry is run with integrity

36
Q

Define financial regulation

A

Limiting the freedom of banks and other financial institutions (in order to maintain stability and integrity within the financial institution)

37
Q

When does moral hazard exist?

A

When a firm or individual pursues profit and takes on too much risk in the knowledge that, if things go wrong, someone else will bear a significant proportion of the cost

38
Q

What is meant by insolvent?

A

When the value of a bank’s assets falls below the level of its liabilities

39
Q

What is a balance sheet?

A

A statement of the assets, liabilities, and capital of a business or other organisation at a particular point in time

40
Q

What is the equation for equity?

A

Assets - Liabilities

41
Q

How is the net worth of a business calculated?

A

Assets - Liabilities

42
Q

Define a credit crunch

A

A sharp drop in confidence and thus a lack of credit

43
Q

Define the money market

A

Financial markets that provide short-term borrowing and lending, usually defined as up to one year

44
Q

What is meant by a security?

A

Secured loans, such as mortgage loans secured against the value of property

45
Q

Which are more risky: secured loans or unsecured loans?

A

Unsecured loans

46
Q

What are the two sections of the capital market?

A

Primary market
Secondary market

47
Q

What is the difference between the primary market and the secondary market?

A

The primary market is where securities are created
The secondary market is where the securities are traded

48
Q

What is the fundamental role of the financial markets?

A

To ensure the smooth operation of capitalist economies

49
Q

What are the two sections of the foreign exchange market?

A

Spot market
Forward market

50
Q

What is the difference between the spot market and the forward market?

A

The spot market involves the immediate exchange of foreign currencies
The forward market involves the exchange of foreign currencies at some specified time in the future

51
Q

What is the foreign exchange market?

A

The market in which different currencies are bought and sold

52
Q

What is credit?

A

A form of deferred payment

53
Q

What is the 2 main objectives of a commercial bank?

A

To profit maximise
To respond to shareholders

54
Q

In relation to borrowing and lending, how does a commercial bank aim to profit maximise?

A

Borrow short term
Lend long term

55
Q

What is bank failure?

A

Where a bank cannot meet its financial obligations to creditors and/or depositors

56
Q

Give 2 consequences of bank failure

A

Systemic risk - effects rest of the financial system
Recession - loss of jobs, income, output, etc

57
Q

Give 2 ways a bank can prevent bank failure

A

Have enough liquidity to avoid a bank run
Have security to manage risk and avoid insolvency
Have a balanced portfolio of assets to mitigate risks that arise from a fall in one area

58
Q

What is a bank run?

A

When many clients simultaneously withdraw their money from a bank

59
Q

Why is a bank run likely to happen?

A

Because clients have a lack of confidence in the bank’s ability to function (presently or in the near future)

60
Q

How does a commercial bank make a profit?

A

They ensure they charge a higher rate of interest on loans than they pay on deposits

61
Q

What is meant by share capital?

A

All the funds raised by a company in exchange for shares

62
Q

How do banks create credit?

A

By giving loans to their customers

63
Q

What are stress tests used for?

A

Used to measure the extent to which financial institutions are vulnerable to the effects of extreme economic events

64
Q

What is the purpose of stress tests?

A

To lower systemic risk

65
Q

Give 3 ways in which a firm could raise finance

A

Issuing shared
Issuing corporate bonds
Borrowing from a bank

66
Q

Define debt

A

The amount of money borrowed from one party to another

67
Q

What is the main risk that arises from commercial banks borrowing short-term and lending long-term?

A

Liquidity risk

68
Q

What is liquidity risk?

A

When a commercial bank may not be able to repay all of their deposits if savers decide to withdraw their funds

69
Q

Give 2 ways that a commercial bank reduce liquidity risk?

A

Attract long-term deposits
Hold some liquid assets as capital reserves

70
Q

Give 3 points that argue against financial market regulation

A

Moral hazard
Regulatory capture
High administration and enforcement costs

71
Q

Explain why financial market regulation may lead to greater moral hazard

A

Interventions such as bank bailouts may cause commercial bankers to take more risks
As they know if the risks go bad, it is the third party (BoE, taxpayers) that have to bail the banks out

72
Q

Explain why regulatory capture is likely to occur as a result of financial market regulation

A

As the best regulators are usually the ones who have previously worked in the banking industry
But they may still have close relationships to CEOs and managers still in the industry

73
Q

What would it be called if the administration and enforcement costs of financial market regulation exceed to benefits?

A

Government failure

74
Q

What are the 3 functions of a central bank?

A

Monetary policy function
Financial stability and regulatory function
Policy operation functions

75
Q

What are the two sections of the ‘policy operation function’ for a central bank?

A

Lender of last resort to the banking system
Banker to the government

76
Q

What is another term for the bank rate?

A

The base rate (of interest)

AQA A-Level Economics Year 2 (11 decks)

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