Macro Four Flashcards
Money Supply, Financial/Banking System, Monetary Policy and Quantity Theory of Money
What are the different uses of money as it evolved
To barter
As commodity money
As representative money
As token money
What is Commodity Money
The first type of money, has its own intrinsic value and doesn’t require the double coincidence of wants
What is Bartering and what does it require
trading one good or service for another and it requires a double coincidence of wants
What is Representative Money
Money is backed by gold held in a bank but may be represented by something else
What is Token Money
Bears no relation to anything of intrinsic value
What are the functions of money
A medium of exchange or means of payments
A store of value
An unit of account or measure of values
A standard of deferred payment
What are the characteristics of money
Acceptable to all
Limited in Quantity
Difficult to Forge
Durable
Portable
Divisible
What does liquidity mean
The ease with which an asset can be converted into cash without loss of value
What are the 6 most to least liquid assets
Cash
Sight Deposits
Time Deposits
Government Bonds
Shares
Physical Assets
If someone deposits £500, what is that to the bank
A liability
What is a financial market
A market in financial assets, including the market for commodity futures and insurance products
What are the types of financial market
Money
Capital
Foreign Exchange
What trading occurs in the money market
Providing short term lending/borrow
What type of trading occurs in the capital market
Trading in securites such as shares and bonds in the medium to long term
What is the Foreign exchange market
Trade in foreign currencies
What forms can bonds take
Corporate (firms) or Government (gilt)
What two markets make up the capital financial market and what do they do
Primary
For newly issued government bonds
Secondary
Where bonds are resold second hand
What two markets make up the foreign exchange financial market and what do they do
Spot
Immediate transfers
Forward
At some time in the future, by importers/exporters to protect against change
Bills are sold at ____ and redeemed at ____
Sold at discount and redeemed at parity
What forms can bills take
Treausury (government) or Commerical (firms)
What is a bond
A form of long-term borrowing and come with a guaranteed amount of annual interest called a coupon
What is a coupon
A guaranteed amount of annual interest on a bond
How is yield worked out (as a decimal)
Annual Coupon divided by Current Market Price
What happens to yield when a bonds price rises
Because the coupon is fixed, as a percentage of a higher price the yield must fall
What are central banks
Acts as a national bank and provides services to the government
What issue can arise from central banks acting as a “lender of last resorts”
Moral Hazards
What are commerical banks
A financial institution that aims to make a profit by selling banking services to customers
What are Investment Banks
A bank that doesn’t accept deposits from the public, would instead offer financial advice and help with the stock market.
Deals with financial markets on their own accord
What makes up a Commerical Bank’s balance sheet
Assets, Liabilities and Equity
Examples of Liabilties (and Equity) for a Commerical Bank
Long-term borrowing
Short term borrowing
Customers’ deposits
Share Capital
Reserves
What are the three objectives of a commerical bank
Profitablilty
Security
Liquidity
What is the fractional reserve banking system
Banks are required to keep a minimum proportion of their deposits as cash (called the reserve requirement)
How is the money multiplier worked out
1 over the reserve requirement (as a decimal)
What are the functions of a Central Bank
Help maintain macroeconomic stability
Bring about financial stability
Act as a lender of last resort
Acting as the banker’s bank
Government bank
International obligations
What is the time lag that a change in the Bank Rate will affect output
1 year
What is the time lag that a change in the Bank Rate will affect inflation
2 years
What is the size of the effect of bank rate changes on output
0.2% - 0.35%
What is the size of the effect of bank rate changes on inflation
0.2 pp - 0.4 pp
What is helicopter money an alternative to and what does it do
It’s an alternative to quantitive easing and it is giving money directly to citzens
What are factors influencing Base Rate Decisions (there are 7!)
GDP growth and spare capacity
International data - costs of imports rising
Labour markets - unemployment/ wage rate
Trends in Foreign Exchange markets
Consumer Confidence
Business Confidence
Asset prices
How can central banks influence the growth of the money supply
Volume of cash produced
Interest rates
Set reserve requirement
Open Market Operations
Quantitative easing
First stage of quantitive easing (With permisson from…)
With permission from the Treasury, B.O.E credits its own account with newly created money, thus increasing the money supply
Second stage of quantitive easing (Uses this money to buy..)
How would you show this on a graph
The B.O.E uses this money to buy financial assets (mostly bonds) in secondary capital markets from banks and financial institutions. This increases demand for bonds causing the price to rise
Stage Three of Quantitive Easing (Given that government bonds…)
Given that government bonds have a fixed coupon (the amount of interest doesn’t change) the more expensive the bonds are the lower the yield
insert numerical example
Stage Four of Quantitive Easing (This brings down the overall…)
This brings down the overall cost of borrowing across the economy as lower yields on bonds drive investors to other markets (…) As a result, banks can remain competitive as an investment even with lower interest rates
What happens as Stages 3 and 4 are happening in an economy (Private sector… loanable funds)
Buying bonds increases the private sector’s assets and their ability to buy goods and services
Banks have more loanable funds making it easier to lend money, thus boosting consumption and investment
Stage 5 of Quantitive Easing (Aggregate demand…)
Aggregate demand increases due to increased business and household confidence and debt financied consumption and investment
Final stage of Quantitive Easing (Increased…)
Increased spending and employment return inflation in the UK to economy to its 2% target
What is the Quantity Theory of Money
Money Supply X Velocity of Circulation == Price Level X Quantity of Goods/Services Sold
What does Macroprudential mean and which regulator(s) manage it
Concerned with identitfying and monitoring risks to the overall stability of the financial system and acting to remove those risks
Financial Policy Committee (part of the BOE)
What does Microprudential mean and which regulator(s) manage it
Has a focus on ensuring the stability of individual banks and financial institutions - identitying, monitoring and acting on risks to individual firms
Prudeuntial Regulation Authority (Part of the BOE)
FInancial Conduct Authority (Not a part of BOE)
What is the primary function of the FPC
To maintain the stability of the financial system overall with a secondary objective in supporting the gov’s economic policy
What is the primary function of PRA
Regulates and supervises individual banks, building societies, credit unions insurers and major investment firms
Responsible for stress tests
What is the primary function of FCA
Aims to make sure financial markets work well by promoting competition and ensuring consumers get a fair deal and ensuring firms act with integerty. Acts similarly to regulator in good markets
What are stress tests
Differs from year to year but looks at individual banks’ resilience to various adverse scenarios such as recession or rising unemployment
What is a run on the bank
Mass deposit withdrawls from a bank
What is a moral hazard
Exists when a firm or individual takes on too much risk knowing someone else will bear the significant portion of the cost
Why can a bank fail
Recklessness
Low-capital ratio
Low Liquidity ratio
Governments let them fail
Run on the bank
Actions of regulator
Rogue employees
How can recklessness occur in a bank
Weak regulations or a lack of “firewall” between investment and commerical wings
(Glass-Steagall Act of 1933 to protect depositors from losses through stock speculation)
What is a bank’s capital ratio
A measure of how much of a bank’s funding comes from a form of equity (shares and reserves)
Is a bank safer with higher or lower capital ratio
Higher, since this never has to be repaid (unlike liabilities)
What is a bank’s liquidity ratio
A measure of the ratio between the bank’s liquid assets and the expected outflows from the bank
Is a bank safer with higher or lower liquidity ratio
Higher, the more cash the business holds relative to withdrawals, the safer it will be
