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The International Economy > financial markets > Flashcards

financial markets Flashcards

1
Q

the four functions of money

A

medium of exchange
measure of value
store of value
method of deferred payment

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2
Q

money as a medium of exchange

A

would have to barter without it

easily facilitates the exchange of goods as no double coincidence of wants is needed

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3
Q

money as a measure of value

A

helping consumers and producers make informed decisions and facilitating agreeable exchanges between buyers and sellers.

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4
Q

money as a store of value

A

holds its value over time, allowing it to be saved and remain useful for exchange, though inflation can affect its value.

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5
Q

money as a method of deferred payment

A

facilitates credit by enabling terms for loans and future debt settlements, allowing goods to be acquired now and paid for later.

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6
Q

the characteristics of money

A

acceptability
portability
durability
scarcity
uniformity
divisibility

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7
Q

the characteristics of money: divisibility

A

currency must be divisible

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8
Q

the characteristics of money; acceptability

A

currency must be valued and widely accepted as meth to pay

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9
Q

the characteristics of money: durability

A

must not be easily defaced or destroyed

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10
Q

the characteristics of money: scarcity

A

must remain desirable and retain value
oversupply will decrease its worth

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11
Q

the characteristics of money: uniformity

A

each denomination must be the same

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12
Q

the characteristics of money: portability

A

easy to carry

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13
Q

what is money supply

A

total amount of money available in an economy at a specific time.
eg cash and deposits

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14
Q

narrow money

A

part of money supply made up of cash and liquid assets

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15
Q

broad money

A

M1 plus less liquid assets like savings accounts, time deposits, and money market funds.

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16
Q

What is liquidity

A

how easily assets can get turned into cash

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17
Q

financial markets

A

a place/system that provides a place to exchange goods and services

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18
Q

role of financial markets

A

Facilitate saving
lend to businesses and indvdls
Facilitate exchange of goods and services
Provide forward markets in currencies and commodities
Provide market for equities

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19
Q

three types of financial markets

A

money market
capital market
FEX market

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20
Q

the capital market

A

provide medium-long term finance
eg corporate and government bonds

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21
Q

what are government bonds

A

debt securities used by gov and sold to indvdl

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22
Q

what are corporate bonds

A

debt securities issued by companies to raise capital

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23
Q

what is the money market

A

short term finance (less than 1 year)
eg commercial bills issued by private businesses
treasury bills issued by gov

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24
Q

what is the FX market

A

trade currencies
central banks, commercial banks, investors and indvdls are participants in this market

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25
Q

what is debt

A

liability that represents what firm owe

26
Q

what is equity

A

all physical and financial assets owned by firm

27
Q

difference between debt and equity

A

DEBT: no ownership rights, money must be paid back w interest and no voting rights

EQUITY: shareholders have ownership rights, shareholder get profit through dividends,
shareholders have voting rights

28
Q

what are interest rates

A

costs of borrowing money or return on savings

29
Q

what are bond prices

A

amount investor are willing to pay for government bonds

30
Q

nominal value of bonds

A

bonds that investors buy at face value

31
Q

coupon of bonds

A

guaranteed fixed annual interest payment to the investor

32
Q

what is the maturity of bonds

A

date of expiration of the bonds
more than a year
leads to investment being illiquid

33
Q

relationship between bond prices and interest rates

A

as interest rates rise bond prices fall
(greater ROI)
as interest rates fall bond prices rise
(lower ROI)

34
Q

how to calculate yield

A

annual coupon payment/ current market price x100

35
Q

what are commercial banks

A

retail banks serve the general public but personal customers and businesses

36
Q

what are investment banks

A

global banks that assist n raising finance for companies

37
Q

characterstics of commercial banks

A

provides loans eg mortgages
provide safe keeping for returns for deposits/ savings

38
Q

examples of commercial banks

A

Barclays
Natwest
HSBC

39
Q

network of commercial banks

A

in high streets and shopping centres

40
Q

characteristics of investment banks

A

issue shares and bonds
financial advisory services to businesses
advice for companies undergoing mergers r acquisitions

41
Q

examples of investment banks

A

jp morgan
morgan stanley
citigroup

42
Q

branch network

A

situated within the square mile of the city of london

43
Q

structure of commercial banks balance sheet

A

show assets and liabilities

44
Q

what objectives do commercial banks face challenge trying to balance

A

liquidity
security
profitability

45
Q

the money creation process fractonial banking

A

Initial Deposit: A customer deposits $100 into a bank.

Reserve Requirement: The bank retains a portion (e.g., 20%) as reserves, keeping $20 and making $80 available for lending.

Lending and Loan Creation: The bank lends out the remaining $80 to borrowers.
Deposit Expansion: Borrowers deposit the $80 into their own accounts, which other banks can use as a basis for further lending.

Money Supply Expansion: This cycle repeats, multiplying the original deposit into new loans and deposits, expanding the total money supply across the banking system.

46
Q

monetary policy actions

A

interest rates
exchange rates
money supply
forward guidance

47
Q

factors to consider when setting bank rate

A

economic expansion- high EG low unemployment increases AD, central bank initiates contractionary monetary policy)

economic contraction- recession decrease in AD bank initiates expansionary monetary policy

48
Q

the instruments of monetary policy is

A

quantitative easing
incremental adjustments

49
Q

impact of a decrease in interest rates

A

exchange rates fall
UK exports get cheaper

50
Q

impact of an increase in interest rates

A

exchange rates rise
UK exports become more expensive

51
Q

using interest rates to lower inflation on graph if inflation high

A

contractionary monetary policy shifts AD to the left
cus interest rates affect the components

52
Q

using interest rates to increase inflation if too low

A

decrease interest rates
go through demand side expansionary policy shifts AD to right
stimulates the AD components

53
Q

UK regulatory bodies

A

The prudential regulation authority (PRA)
The financial policy committee (FPC)
THE Financial conduct authority (FCA)

54
Q

The Prudential Regulation Authority (PRA)

A

creates regulations for banks, insures
helps to avoid insolvency of bank
make sure they adhere to rules and regulations

55
Q

The financial policy committee

A

to create financial stability
identify, track and address risks to financial system in the uk

56
Q

the financial conduct authority (FCA)

A

regulate financial srvices firms and financial markets

ensure they are operating fairly and in the best interest of consumers

57
Q

why banks might fail

A

regulation violation
high-risk loans
speculation and market bubbles
asymmetric information

58
Q

why are banks required to meet capital and liquid ratios

A

to evaluate their capacity to manage unexpected shocks

59
Q

liquidity ratio

A

is the ratio of the banks’ cash and other liquid assets to its deposits
measures banks ability to cash needs

60
Q

what is capital ratio

A

amount of capital on a banks balance sheet as a proportion of its loans
to identify the risk associated with lending

61
Q

what is moral hazard

A

when banks indulge in risky behaviour

62
Q

what is systemic risk/failure

A

when a minor problem in one countrys financial sector has international consequences
that can even break the entire financial system

The International Economy (6 decks)

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