Financial markets and monetary policy Flashcards
What is money?
Money primarily a medium of exchange or means of payment but also a store of value
What are the function of money?
A medium of exchange or means of payment meaning that the economy we live in is a monetary economy in which most of the goods and services produced are traded or exchanged via the intermediary of money rather than through barter
What are the functions of money?
A store of value or store of wealth is when money is also an asset something people own which has value. Most people store some of their wealth in the form of money in reference to holding other financial assets such as stocks and shares.
What are the characteristics of money?
A measure of value : Money provides a means to measure the relative
values of different goods and services.
What are the characteristics of money?
A method of deferred payment: Money can allow for debts to be created. People can therefore pay for things without having money in the present, and can pay for it later.
This relies on money storing its value. Money acts as standards of deferred payment whenever firms sell goods on credit or draw up contracts specifying a money payment due at a later date
What are the characteristics of money?
The earliest form of money was commodity these are functioned as money had an intrinsic value of their own: they yielded utility and consumer service to their owners.
What is money supply?
Is the stock of financial assets which function as money
What is narrow money?
The part of the stock of money made up of cash and liquid bank and building society deposits
What is broad money
This includes the entire money supply. Cash could be in restricted accounts, which makes it hard to calculate the money supply. It includes liquid and less liquid
assets.
What is the money market
In the money market, liquid assets are traded. It is used to borrow and lend money in the short term.
What is the capital market
The capital market is where equity and debt instruments are bought and sold. These can then be put to long-term productive use by firms and governments.
What is the foreign exchange market?
The foreign exchange market is a market where currencies are traded, mainly by international banks. It determines what the relative value of different currencies will be.
What is the inverse relationship between bond prices and interest rates
There is an inverse relationship between market interest rates and bond prices.
When a bond is bought, money is lent to the issuer. The issuer agrees to pay the value of the bond back when it matures, in addition to periodic interest payments.
The rate of interest is fixed when the bond is issued.
New bonds have rates close to the market interest rate. If the market interest rate falls, for example, the bond would be worth more, since it carries a higher interest rate than current market conditions. Similarly, the bond is worth less is the rate increases. This is because the bond has a lower interest rate than the current market.
Borrowing could involve paying back loans with high interest rates, which could be expensive. This might be unaffordable for new, smaller firms. However, it is flexible and the funds can be increased or decreased by borrowing more or paying back the
loan.
