financial markets, types of banks, monetary policy, regulation

Question 1

4 functions of money

Answer 1

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

Question 2

money supply

Answer 2

the stock of currency and liquid assets in an economy

Question 3

narrow money

Answer 3

physical currency (coins and notes) and deposits/liquid assets held in a bank

Question 4

broad money

Answer 4

entire money supply

Question 5

money market

Answer 5

liquid assets are traded in a money market and used to borrow or lend to individuals in the short term

Question 6

capital market equity

Answer 6

equity and debt instruments are bought and sold then put to long term use by firms

Question 7

forex market

Answer 7

where currencies are traded by international banks

Question 8

5 roles of financial markets in the wider economy

Answer 8

facilitate saving
lend to businesses and individuals
to provide forward markets
provide a market for equities
facilitate exchange

Question 9

providing forward markets

Answer 9

currencies can experience speculative attacks which affect their value
in commodity markets investors trade primary products e.g gold and oil by future contracts

Question 10

providing markets for equities

Answer 10

trading shares (stock market) provides access to capital to firms
allows investors to own market
returns on investments are based on future performance

Question 11

inverse relationship between market interest rates and bonds

Answer 11

bonds are issued with a. fixed interest rate
when market IR goes down the bond holds more value
and vice versa

Question 12

how can firms raise finances

Answer 12

issuing corporate bonds
issuing shares
borrowing from the bank

Question 13

negatives of borrowing

Answer 13

repaying the loan if it has a high interest rate

Question 14

coupon

Answer 14

the interest payment on a bond between the date of issue and date of maturity

Question 15

commercial bank

Answer 15

manages deposits, cheques, and savings for individuals and allows them to make loans

Question 16

investment banks

Answer 16

facilitate the trade of bonds, stocks and investments where govt regulation is weaker

Question 17

main functions of a commercial bank

Answer 17

accept deposits
provide loans
create overdrafts
investments of funds

Question 18

what are balance sheets

Answer 18

they show the value of assets, liquidities and equity

Question 19

asset

Answer 19

something that can be sold for value

Question 20

liability

Answer 20

something that must be payed (they buy assets)

Question 21

liabilities include

Answer 21

share capital, deposits, borrowing and reserve funds

Question 22

assets include

Answer 22

cash,securities,bills,loans and investments

Question 23

what are the three objectives of a commercial bank

Answer 23

liquidity
profitability
security

Question 24

liquidity

Answer 24

how easy it is to turn assets into cash
if liquidity is prioritised then profit is low
if banks can borrow cheaply or easily then they are likely to keep fewer liquid assets

Question 25

profitability

Answer 25

this is used to pay depositors interest, wages for employees and other general costs
holding lots of funds in cash is limiting profit
not typically a prioritised aim

Question 26

security

Answer 26

if a bank has to keep high proportions of liabilities with itself and the central bank then they hold onto the safest assets more credit can’t be crated

Question 27

how is credit created

Answer 27

by extending loans to businesses and households