Financial markets and monetary policy

Question 1

Monetary Policy Committee (MPC)

Answer 1

Group of nine members who are responsible for making decisions about the bank rate

Question 2

Functions of a central bank (4)

Answer 2

Manages currency, money supply and interest rates within an economy

Issue physical cash

Advise and manages payments to/from government

Lender of last resort

Question 3

Quantitative Easing

Answer 3

Monetary policy used by central bank to increase domestic money supply and spur economic growth

Question 4

Monetary Policy

Answer 4

Involves the changing of interest rates, exchange rates, supply of money and credit

Question 5

Gilts

Answer 5

Government Bonds (loans from governments)

Question 6

Characteristics and functions of money

Answer 6

Medium of exchange

A measure of value

A store of value

A method of deferred payment

Question 7

Money Supply

Answer 7

The stock of currency and liquid assets in an economy

Question 8

Narrow Money

Answer 8

Physical currency, deposits and highly liquid assets in a central bank

Question 9

Broad Money

Answer 9

Includes all items in narrow money but also any other liquid assets

Question 10

Money Market

Answer 10

Where liquid assets are traded as well as borrowing/lending money in the short term

Question 11

Capital Market

Answer 11

Where equity and debt instruments are bought/sold so are more long term

Question 12

Foreign Exchange Market

Answer 12

Where currencies are traded

Question 13

Roles of Financial Markets in Economy

Answer 13

To facilitate saving

Lend to businesses and individuals

Facilitate exchange of goods/services

Provide forward markets in currencies and commodities

Market for equities

Question 14

Debt

Answer 14

Money that has been borrowed from a lender

Question 15

Equity

Answer 15

Stock or security

Question 16

Commercial Banks

Answer 16

A financial institution that facilitates the borrowing and lending of money

Question 17

Investment Banks

Answer 17

Facilitates the trading of securities and organising large, complex financial transactions (e.g. mergers/acquisitions, underwriting)

Question 18

Main Functions of Commercial Banks

Answer 18

Accept deposits

Provide loans

Overdraft facilities

Question 19

Liability

Answer 19

Something which must be paid

Question 20

Asset

Answer 20

Something which can be sold for a value

Question 21

Liquidity

Answer 21

How easy it is to transfer asset into cash

Question 22

Fiscal Policy

Answer 22

The manipulation of government spending, taxation and the budget balance

Question 23

Budget Deficit

Answer 23

When government spending exceeds fiscal revenue

Question 24

Budget Surplus

Answer 24

When fiscal revenue exceeds government spending

Question 25

Direct Taxes

Answer 25

Taxes that are imposed on income and are paid directly to the government

Question 26

Indirect Taxes

Answer 26

Taxes imposed on goods/services which increase costs for producers

Question 27

Proportional Tax

Answer 27

Tax which is the same for every taxpayer

Question 28

Progressive Tax

Answer 28

Increase in average rate of tax as income increases

Question 28

Regressive Tax

Answer 28

Those on lowest incomes have to pay higher rates of tax

Question 28

Transfer Payments

Answer 28

Welfare payments from the government

Question 29

Cyclical Deficit

Answer 29

Temporary deficit during the economic cycle (usually in a recession)

Question 30

Structural Deficit

Answer 30

Deficit not relating to the state of the economy like an ageing population

Question 31

Supply-Side Policies

Answer 31

Policies that aim to improve the long run productive potential of the economy

Question 32

Automatic Stabilisers

Answer 32

Part of fiscal policy that automatically react to changes in the economic cycle