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Economics - Year 11 > Financial Markets > Flashcards

Financial Markets Flashcards

1
Q

Financial Markets

A

Any situation where the buyers and sellers of finance are brought together to exchange finance for financial products/assets/securities and a payment (interest/dividends)

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2
Q

Financial markets are considered to be a part of the…

A

Factor market

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3
Q

Primary Financial Markets

A

allow for the creation of financial assets/securities that can be ‘sold’ in the Australian economy

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4
Q

Secondary Financial Markets

A

involve transactions in financial securities that have already been issued in the primary market for some time in the past

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5
Q

Financial Market Products

A

Consumer Credit

Housing Loans

Business Loans

Short-Term Money Market

Bonds

Financial Futures & Options

The Foreign Exchange

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6
Q

Share Market

A

The share market or stock exchange is the market for:

The issue of and trading in “shares” or ownership of public companies

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7
Q

Why do individuals invest in the share market?

A

Investors who buys share in a company gain part ownership in that company

The company then may pay dividends (a percentage of the company’s profits) to shareholders

Capital gains are the profits made by investors who sell their shares at a price above the level that they originally paid for them

Shareholders are also allowed to vote for the company’s board of directors

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8
Q

Why dod companies sell shares?

A

For companies, the share market provides an opportunity to raise new funds for investment

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9
Q

The All Ordinaries Accumulated Index

A

measures the changes in the level of share prices at any given time of the 500 largest Australian companies to determine the overall performance of the ASX

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10
Q

Foreign Exchange Markets

A

where financial assets defined in one country’s currency are exchanged for assets defined in another country’s currency

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11
Q

Debt Markets

A

where debt securities (such as bonds) are exchanged, or cash is lent/borrowed

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12
Q

Equity Markets

A

where ownership of shares in companies are issued or exchanged

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13
Q

Derivaties Market

A

where people buy and sell financial assets that are based on the value of other financial assets

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14
Q

Roles of the RBA

A

Ensure the overall stability of the Australian financial system

Conduct monetary policy on behalf of the Australian Federal government

Control the issue of currency notes

Regulate the payments system (credit cards & electronic cash)

Hold accounts that allow banks to settle transactions between themselves

Hold reserve of foreign exchange currency and gold

Act as a banker and source of economic advice to the Australian government

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15
Q

The Australian Prudential Regulation Authority

A

APRA regulates all authorised deposit taking institutions (ADIs) such as banks and NBFI’s

They ensure that ADIs maintain their financial obligations to their investors

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16
Q

The Australian Securities and Investment Commission

A

ASIC is responsible for consumer protection in the financial system by monitoring and investigating institutions whose financial intermediaries are acting illegally

It registers businesses and monitors the operation of companies and the ASX to ensure that they follow the Corporations Act 2001

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17
Q

The Australian Treasury

A

Monitors the Australian economy and overseas countries economic performance

Provides advice to the government in relation to Monetary Policy and Fiscal Policy

18
Q

The Council of Financial Regulators

A

The co-ordinating body for Australia’s main financial regulatory agencies

Advises the government on the effects of Australia’s financial system of events in the Australian and global economy

19
Q

Why do governments borrow?

A

Governments borrow to stimulate economic activity, as well as to:

Finance budget deficits
Build infrastructure
Finance tax cuts

20
Q

Commonwealth Government Bonds

A

A financial security which has a fixed rate of interest over a given period of time

21
Q

At high rates of interest…

A

demand will be low and supply will be high

22
Q

At low rates of interest….

A

demand will be high and supply will be low

23
Q

Factors that impact the supply and demand of funds

A

Level of Economic Activity

Government Budget Outcome

Level of household income and their APS/MPS

Access to international financial markets

Success of Business (Profit Levels)

24
Q

Transactionary Motive

A

the demand or supply of finance is a result of the demand for goods and services

25
Q

Precautionary Motive

A

a desire to have some finance set aside for unforeseeable events, such as an economic downturn, unemployment or illness

26
Q

Speculative Motive

A

the holding, supplying or borrowing of finance so that investment opportunities which bring about a return can be taken advantage of

27
Q

What is money?

A

A medium of exchange

A measure of value

A store of value

A method of deferred repayment

28
Q

Money Supply

A

the total amount of funds in an economy

29
Q

Currency

A

all notes and coins in circulation (accounts for less than 5% of the money supply)

30
Q

Money Base

A

all currency in circulation and all bank deposits with the Reserve Bank (a measure of most liquid financial assets)

31
Q

M3

A

Consists of the money base plus all bank deposits

32
Q

Broad Money

A

consists of M3 plus deposits in non-bank financial intermediaries (NBFIs) minus their holdings of bank deposits

33
Q

Credit

A

Loans that are provided by banks to household and business borrowers

34
Q

Factors that Impact the Interest Rate

A

Demand For Capital Goods

The Level of Savings

Demand for Liquid Funds

Rate of Inflation

Government Budget

International Interest Rates

RBA

35
Q

Monetary Policy

A

Macroeconomic policy that aims to influence the supply and cost of money in an economy

Focuses on targeting/controlling inflation

36
Q

Overnight or Short Term Money Market

A

Where banks borrow and lend from each other from short periods of time to maintain the balances in their ESA

37
Q

Exchange Settlement Accounts

A

Used to settle transactions between the RBA and with other banks - must maintain a minimum balance at all times

38
Q

Cash Rate

A

Interest Rate in the OMM

39
Q

Interest Rate Corridor

A

25% above and below the cash rate

40
Q

Open/Domesitc Market Operations

A

actions taken by the RBA to achieve a predetermined target cash rate (% rate in the overnight money market)

41
Q

Tightening Monetary Policy

A

RBA sells CGBs to Banks ESA

Decrease in the supply of cash in the OMM

Shortage of cash in the OMM

Increase in the cash rate & interest rate corridor

Banks increase their interest rates to maintain their interest rate differential

Decrease in consumption and the levels of investment

Decrease in the level of economic activity, employment & inflationary pressures

42
Q

Loosening Monetary Policy

A

RBA buys CGBs from Banks ESA

Increase in the supply of cash in the OMM

Surplus of cash in the overnight money market

Decrease in the cash rate & interest rate corridor

Banks decrease their interest rates to maintain their interest rate differential

Increase in consumption and the levels of investment

Increase in the level of economic activity, employment and inflationary pressures

Economics - Year 11 (6 decks)

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