MACRO Flashcards
Characteristics of Money
- durable
- portable
- divisible
- Hard to counterfeit
- Must be accepted by the population
- valuable
- scarce
Functions of Money
- Medium of exchange-allows goods and services to be traded without the need for a barter system.
- Store of value- any assets who’s ‘value’ can be used now or in the future.
- Measure of value- value of something that is expressed in an undesirable way.
- Standard of deferred payment- expressing the value of debt.
money supply
-The Bank of England makes sure it creates enough banknotes to meet the demand for them.
M0-notes and coins plus central bank reserves
M2M- notes and coins plus all sights deposits held by the non-bank private factor.
M2- notes and coins plus all retail deposits held by non bank private sector.
M4- notes and coins deposits, certificates of deposits, securities with a maturity of less than 5 years held by non bank private sectors.
Narrow Money
Is a measure of the value of coins and notes in circulation and other money equivalents that are easily converted into cash, such as short term deposits in the banking system.
Broad Money
Measure of the total amount of money held by households and companies in the economy-made up mainly of commercial banks.
Motives for money
- Transaction motive–to pay for goods and services
- Precautionary motive–investment that rarely loses value
- Speculative motive-provide a return to their holder.
Gresham’s Law
Bad money drives out good money.
coins composed of the cheaper metal will be used for payment, while those made of more expensive metal will be hoarded or exported and tend to disappear from circulation
Factors affecting Supply of money
- open market operations- (same as quantitative Easing) the Central Bank buys government Bonds effectively creating money.
- The reserve requirement imposed on banks- % of deposits made by customers at the bank that the bank must keep a hold of rather than lend out.
- the policy interest rate set by the bank of England- rate of interest will influence how many households and businesses are willing and able to borrow
Factors affecting demand of money
- rate of interest on loans.
- number/value of monetary transactions that we expect to carry out
- the extent to which we want to hold other financial assets (e.g. bonds, property, saving) known as speculative motive for holding money.
- change in GDP
- extent to which it is possible to use debit cards/credit cards
- extent to which we might have to pay out large unexpected payments
- rate of anticipated inflation
Money markets
Money for short term loan finance for businesses and households
- money borrowed and lent for 12 months
- includes internal bank lending
- includes short term govt borrowing to help fund govt budget deficit.
Capital markets
markets for medium-longer term loan finance
- markets where securities such as shares and bonds are issued to raise medium to log term financing
- raising finance to fund govt budget deficit through issues of bonds.
govt bonds
a promise to pay periodic interest payments and to repay the face value on the maturity date.
where hot money goes
- bank accounts
- shares
- property
- currency
- bonds/debentures
- antiques
Foreign Exchange markets
market where currencies are traded-no single currency market made of thousands of trading floors
- spot exchange rate is the price of a currency to be delivered now
- forward exchange rate is a fixed price given for buying a currency today to be delivered in the future.
Role of financial markets
- to facilitate saving by businesses and households.
- to lend to businesses and households
- to facilitate exchange of goods and service
- provide forward markets to currencies and commodities.
- to provide a market for equities (shares)
sources of business finance
long term
- share capital
- retained profits
- venture capital
- mortgages
- long term bank loans
medium term
- bank loans
- leasing
- hire purchase
- govt grants
short term
- bank overdraft
- trade creditors
- short term bank loans
- factoring
Debt finance
borrowing money from an outside source with promise of paying back borrowed amount, plus interest, at a later date.
Bank Loans
- loans provided over a fixed period
- timing and amount of loans repayments are set by the lender.
- unsecured loans pay higher interest rates because of risks
Benefits -greater certainty of funding, provided terms of loan complied with it -lower interest rate than bank overdraft -appropriate method of financing fixed assets. Risks -requires security -interest paid on full amount -harder to arrange -startups and small businesses excluded.
bank overdraft
short term facility-banks let business “owe it money” when bank balance goes below 0.
Helps businesses handle seasonal fluctuations in cash flow or when business run s short term cash flow problems.
Equity
equity finance
sales of shares don’t have to be paid back, only pay dividends
raising capita; by selling shares of the business to investors
Advantages/ disadvantages of equity finance
advant
- equity is risk capital and doesn’t offer a fixed return-business has some control over when to pay a dividend to investor.
- gives businesses more flexibility
disadvant
- dilution of ownership for the original founders
- equity require higher return than debt as it is risk capital.
- growing expectations overtime that dividends will be paid.
Public sector debt
owed by central and local govt and by public corporations
Private sector debt
owed by private businesses and households.
- companies borrowed finance for investment
- households have loans such as credit card debts and mortgages on properties.
Benefits/disadvantages of bank overdraft
advant.
- easy to arrange
- flexible
- interest, only pay amount borrowed under facility
disadvant.
- withdrawn at short notice
- interest charge varies with change in interest rate
- higher interest rate than bank loans.