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FINANCIAL MARKETS + MONETARY POLICY Flashcards

1
Q

3 conditions to use QE

A

Low credit availibility
Low confidence
Low willingness of banks to lend

2009 recession

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2
Q

Steps 1-3 QE

A

BoE creates money electronically
Purchase gov bonds off market
Prices G.Bonds rise, yield falls

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3
Q

Affect of steps 2-3 QE

A

Assets replaced with cash (liquidity)
Higher prices reduce incentive to hold bonds

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4
Q

Step 4 QE

A

Institutions either loan money out or invest into corporate bonds/ shares
Leads to wealth effect to consumers who hold shares, stimulating investment/ consumption
+ Reduced cost of borrowing due to inverse relationship

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5
Q

Overall effect of QE

A

Access to credit improves
Increased willingness + reduced interest rates
Stimulates borrowing, higher investment + consumption

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6
Q

Bond

A

IOU, debt issue
Issued on primary, resold on secondary capital market

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7
Q

Calculate bond yield

A

(Coupon/ market price) x 100

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8
Q

Process of credit creation

4 steps

A

Savers initial deposit
Bank reserves 10%
Loans rest to borrowers
New deposit made by income to 3rd party from investment, consumption from borrower (process repeats)

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9
Q

Type of banking system for credit creation

A

Fractional reserve banking

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10
Q

Money multiplier

A

Maximum number of times the initial deposit amount will be increased with respect to the given change in the deposits

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11
Q

MM formula

A

1/ Reserve ratio

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12
Q

Credit created formula

A

(MM x Intitial deposit) - initial deposit

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13
Q

Financial market

A

Where buyers + sellers trade financial assets

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14
Q

Examples of financial intermediarys

A

Commercial banks
Investment banks
Pension funds
Hedge funds
Mutual funds

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15
Q

Types of financial markets

A

Money
Capital (primary + secondary)
Currency

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16
Q

Spot vs futures

A

Spot = existing market price
Futures = currency decided in advance at a given rate

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17
Q

Use of futures

A

Importers worry of weak ER, buy up exisiting reserves to purchase imports in the future (speculation)

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18
Q

3 Functions of money

A

Medium of exchange
Store of value
Measure of value
Standard of deffered payment

19
Q

3 Characteristics of money

A

Acceptable
Portable
Durable
Divisible
limited
Difficult to forge

20
Q

Types of money

A

Commodity
Fiat
Near

21
Q

Commodity money

A

Backed by an asset (gold), to trade in against hyperinflation

22
Q

Fiat money

A

Not backed by anything

23
Q

Near money

A

Non cash assets

24
Q

Catergories of money supply

M0 -> M4

A

Narrow (M0) = notes, coins, deposits
Broad (M4) = bonds with maturity dates > 5yrs

Liquidity reduces down list

25
Quantity theory of money
direct link between money supply + inflation
26
Fisher equation
MV = PQ
27
Coefficients of Fisher eq
Money supply Velocity of circulation Price level Qty goods + services
28
Fisher EQ states
V + Q fixed, due to little effect on inflation Therefore, more money chasing same amount of goods means prices rise to compensate | Evidence 2-2.5% trend growth rate
29
Factors affecting interest rates
Reserve requirements Discount/ bank rate Open market operation (bonds)
30
Commercial banks | Objectives
Accept savings Lend Financial intermediaries Advisory | Profit, security, liquidity
31
Investment banks
Proprietry trading Market making M+A
32
Systematic risk
Risk that affects the entire market, rather than a specific company or industry
33
Balance Sheet
record of all assets, liabilities, and capital at a given time
34
Commercial bank failure
Bank Run- insufficient short term assets to meet liabilities Insolvency- insufficient capital to offset asset values (liabilities > assets)
35
Systemic risk prevention
Cash ratio Liquidity ratio Leverage ratio Capital ratio Reserve requirement
36
Role of central bank
Implememt monetary policy Banker to gov. lender of last resort regulator
37
Evaluation of last resort
38
Causes of FMF
Excessive risk/ moral hazard Collusion + price fixing
39
History of deregulation
40
Types of FMF
Speculation + Bubbles Asymmetric information Negative externalities Collusion + price fixing
41
FM regulators
Monetary policy committe (MPC) Prudential regulation authority (PRA) Financial conduct authority (FCA)
42
Outline MPC
43
Outline PRA
44
Outline FCA

Macroeconomics (AQA) (7 decks)

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