financial sector

Question 1

what are the tools used by the Bank of England

Answer 1

• exchange rate policy
• interest rates
• quantitative easing
• controlling the money supply

Question 2

what is meant by maturity

Answer 2

the date which the borrower has to repay the lender

Question 3

what is meant by the yield

Answer 3

• income return on an investment
• OR
• the longterm rate of interest earned

Question 4

what is meant by the coupon

Answer 4

the guaranteed amount of interest payed to the bond holder (expressed by the face value of the bond)

Question 5

how do you workout the yield

Answer 5

coupon/market price * 100

Question 6

what is the difference between the yield and the coupon

Answer 6

the coupon of the bond is fixed where as the yield on the bond changes according to the market price of the bond

Question 7

what are tools used to fix fiscal deficits

Answer 7

• fiscal austerity
• automatic stabilisers

Question 8

how does fiscal austerity work

Answer 8

• cuts in public expenditure
• increases in taxation

Question 9

what are the roles of the financial sector

Answer 9

• allow savings
• allow lending/borrowing
• allow exchnage of goods and services
• allow equities to be bought and sold

Question 10

different types of financial institutions

Answer 10

• retail/commercial banks
• investment banks
• saving vehicles
• speculators

Question 11

when does Lender of last resort occur

Answer 11

occurs when banks face liquidity problems

Question 12

why do financial regulations take place

Answer 12

• prevent financial institutions engaging in risky practices that could damage customers
• prevent systematic failure(when the whole financial system collapses)

Question 13

what are the authorities that are in charge of financial regulations

Answer 13

• Prudential Regulation Authority(PRA)
• Financial Conduct Authority (FCA)

Question 14

what is an example of asymmetric information

Answer 14

Payment Protection Insurance (1990s - 2000s)

Question 15

why should the government bail out banks

Answer 15

• customer protection
• prevents the collaps of other banks (consumers taking money out)

Question 16

why shouldn’t the government bail out banks

Answer 16

• LR gov debt(higher tax in future)
• moral hazard ( will encourage reckless behaviour in the future)

Question 17

what financial regulations did the federal reserve(US) implement in 2011

Answer 17

Basel III - conduct stress test to see how the bank would respond in case of a financial crisis

Question 18

what are the different types of market failure in the financial sector

Answer 18

• asymmetric information
• speculations and market bubbles
• moral hazards
• negative externalities

Question 19

what is asymmetric information

Answer 19

when one party know more than another in a transaction

Question 20

what is an example of asymmetric information

Answer 20

bankers knew more about the adjustable rate subprime mortgages than the people they were selling them to

Question 21

what is an example of negative externalities

Answer 21

banks didnt have enough money to lend out to business. people became unemployed, so real GDP decreased.

Question 22

what is an example of a moral hazard

Answer 22

after the financial crisis in 2008 the US spent 700 billion of tax payers money to stop banks from going bankrupt

Question 23

when does market rigging occurs

Answer 23

when firms try to control prices which distorts the price mechanism