Financial Markets And Monetary Policy Flashcards
Functions of money
Medium of exchange- without money, transactions were conducted through bartering
G/s were traded with other g/s , but people did not always get exactly what they wanted or needed
Exchange could only take place if there was a double coincidence of wants ; if both parties have to want the food the other party offer
Using money eliminates the problem
A measure of value- money provides a mean to measure the relative values of different g/s
For example a price of jewelry might be considered more valuable than a table because the relative price, measured by money . It also puts a value on labour
A store of value- money has to hold its value to be used for payments
Can be kept for a long time without expiring
However the quantity of goods/services that can be bought with money fluctuates sightly with the forces of supply and demand
A method of deferred payments-
money can allow for debt to be created
People can pay for product later despite their consumption taking place now
This relies on money storing its value
Because money is an accepted medium of exchange = enable credit to be offered so payments can take place at a future date
The characteristics of money
- durability - money must be able to withstand being used repeatedly
- portability - easily transportable so it can be easily transferred to other individuals
- divisibility- money can be divided into smaller units of value
- acceptability - widely accepted for it to be usable for different types of transactions
- scarcity- limited in supply to ensure its value remains relatively stable
- security
Definition of money supply and distinction between narrow money and broad money
The money supply is the stock of currency and liquid assets in an economy
Types of financial assets
Narrow money- based he basic amount of notes and coins as well as deposits and liquid assets in the central bank
Broad money- includes all notes and coins and deposits in savings account and other less liquid assets
So it includes the entire money supply
Liquidity is the ease and speed in which asset can be turned into cash
Cash is a highly liquid asset, whereas property less liquid
The difference between money market, the capital market and the foreign exchange market
- ( the wide variety of financial market)
The money market- provides short term , stoically 24hrs to 12 months, finance to individual, firms and governments
This includes interbank lending and the purchase of treasury bills by gov
Capital market
Provides medium to long term finance to firms and governments
This includes- companies issuing shares or corporate bonds or government issuing bonds to finance their borrowing re
- primary capital market- where newly issued securities are sold by common or gov
- secondary capital market- where previously issued shares or bonds are traded such as London stock exchange
The foreign exchange market
- is the market where different currencies are bought and sold
International trade and investment necessitates the conversion of one currency to another
Foreign market can be conducted in either the spot market or forward market
The spot market involves the immediate exchange of foreign currency
The forward market involves the exchange of foreign currency at some specified time in future
Typically used by exporters and importers to protect themselves from large exchange range fluctuations
