Financial markets and monetary policy

Question 1

purpose of banks and financial institutions

Answer 1

make money available to those who want to spend more of their income through loans, accounts, equity and bonds

Question 2

difference between debt and equity

Answer 2

debt is borrowed money you must pay back, equity is sold shares claimed

Question 3

money markets

Answer 3

markets which provide short term finance to banks

Question 4

capital markets

Answer 4

meduim and long term finance by issuing bonds, issuing shares

Question 5

foreign exchange markets

Answer 5

where different currencies are brought or sold

Question 6

Bond yield equation

Answer 6

coupon divided by market price * 100

Question 7

role of commercial banks

Answer 7

accept savings, lend to individuals or firms, allow payments between people

Question 8

role of investment banks

Answer 8

buy and sell bonds and shares on behalf of client

offer advice on raising finance

Question 9

functions of money

Answer 9

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

Question 10

Narrow money

Answer 10

refers to the notes and coins in circulation plus balances which is very liquid

Question 11

broad money

Answer 11

assets that are less liquid as well aswell as things which make up narrow money

Question 12

commercial bank balance sheet

Answer 12

assets-cash,investment fixed assets

liabilities- share capital, reserves,borrowing

Question 13

role of central bank

Answer 13

act as a banker to the government, help to support banks as a lender of last resort

Question 14

central bank implementing monetary policy

Answer 14

central bank can manage the money supply through quantitative easing

, affect the amount of loans through capital requirements,

controlling the issuing of bank notes

Question 15

monetary policy

Answer 15

involves making decisions about interest rates, money supply and exchange rates

Question 16

contractionary monetary policy

Answer 16

reducing aggregate demand using high interest rates, restrictions on money supply and strong exchange rate

Question 17

expansionary monetary policy

Answer 17

increasing aggregate demand, high interests rates, fewer restrictions on money supply, weak exchange rate

Question 18

aim of UK monetary policy

Answer 18

to ensure price stability, low inflation, promoting economic growth

Question 19

Monetary price committee

Answer 19

sets interest rates in order to meet inflation target which is 2% if inflation went higher it would increase interest rates to reduce aggregate demand.

Question 20

factors affecting the setting of the interest rate

Answer 20

economic data like house prices, pound exchange rate, any increases or decreases in earnings

Question 21

hot money

Answer 21

when interest rates are high people want to buy the pound to get rewards

Question 22

Big Bang

Answer 22

deregulating financial markets in 2008

Question 23

capital ratio

Answer 23

the ratio of a banks capital to loans it measures the risks associated with lending and stability

Question 24

Liquidity ratio

Answer 24

the ratio of highly liquid assets to the expected short term need for cash it gives the bank stability and can help meet short term liabilities

Question 25

microprudential regulation

Answer 25

to ensure that individual firms act fairly towards their customers and dont break the law

Question 26

Macroprudential regulation

Answer 26

tackles systemic risks and avoids large scale financial crises

Question 27

FPC

Answer 27

financial policy committee identifying monitoring and protecting against systemic risk in financial system

Question 28

PRA

Answer 28

prudential regulation authority, maintaining stability and promoting effective competition

Question 29

FCA

Answer 29

financial conduct authority, regulator which aims to protect consumers and increase confidence in financial institutions by promoting competition, banning products, supervising conduct of firms so they are fairly