Financial Markets and Monetary Policy ( Macro ) Flashcards
What’s the difference between the money market and the capital market
- Money markets: means for lenders and borrowers to satisfy their short-term financial needs
- Capital markets: means for lenders and borrowers to satisfy their long-term financial needs
What’s the difference between debt and equity?
Debt is what people owe, and equity is what they own ( e.g if you buy shares in a company you have equity in it )
How does the inverse relationship between market interest rates and bond prices work?
- Bonds have fixed interest rates
- If interest rates go down, the higher interest on the bond is more appealing, driving up its price
- On the other hand, if interest rates rise, price of bond must decrease to match it
What are the main functions of a central bank?
- Helping the government maintain macroeconomic stability ( deliver price stability + supporting government’s economic objectives )
- Bringing about financial stability in monetary system
What type of economic policy is monetary policy generally considered to be?
demand-side economic policy
What does expansionary monetary policy entail?
- Attempts to increase inflation
- Tries to shift demand rightwards
- Lowers the central bank’s interest rate, thus lowering commercial bank’s rates, so incentivises spending
What indicators influence the Monetary Policy Committee’s action on setting bank rates?
- Unemployment rate
- Level of saving
- State of consumer / business confidence
( additional )
- Changes in retail sales
- Effect of adverse external shocks
How does a bank rate change lead to influencing inflation?
What’s the relationship between bank liquidity ratios and their capital ratios?
Banks have to reach a balance between the two, as banks must have enough liquidity to meet its near-term obligations and give money back, whilst they also need to have certain amount of capital, as it’s a safety measure in case of a fall in the value of its assets
