Macroeconomics, part 8- Financial Markets and Monetary Policy Flashcards
What are the characteristics of money?
- Durability
- Portability
- Divisibility
- Uniformity
- Limited supply
- Acceptability
What are the functions of money?
-Medium of exchange
-Measure of value
-Standard of deferred payment
-Store of value
Money it has functions four, medium, measure, standard, store
Current account definition:
Cash can be withdrawn immediately so these perform the functions of money
Savings account definition:
Can’t withdraw cash immediately so doesn’t act as a medium of exchange, but does act as store of value
Reasons for charging interest on a loan:
- Admin fee
- Counteract inflation
- Reward for risk
Deposit guarantee scheme:
If a bank goes bankrupt, the government will pay the people back some of the money. This is because the banks are too important for the government to let them fail. The banks know this so will sometimes do what they want, they considered a moral hazard.
External sources of finance definition:
Finance provided by people or institutions outside the business. Creates debt that will require payment
Sources of long term finance:
External: -Long term loans -Issue shares Internal: -Sale and leaseback -Retained profit
Rights issue definition:
When a company issues more shares. They are offered to the existing shareholders in the same proportion so the proportion of ownership in the company does not change
Shares for a private company (Ltd):
Not traded in a market
Shares for a public company (Plc):
Traded on the stock market
Advantages of shares:
- No need to repay the money invested
- Cheaper than a loan
- Some businesses can raise large sums of money
Disadvantages of shares:
- Need to pay the shareholder a share of future profits
- Original owners may lose control of the business
- Risky for the shareholder- the investment may be lost if the business fails
Money market:
Market for loans. The price of the loans in the interest rate
Loanable funds theory:
- Low consumer confidence means there is an increase in loanable funds
- This causes banks to lower their interest rates
- This encourages people to borrow more
Capital markets:
The part of the financial system concerned with raising capital by dealing in shares, bonds and other long term investments
Primary market:
Initial public offering of shares. Also known as floatation
Secondary market:
Buying and selling existing shares
Spot market:
Buying and selling currencies
Forward market:
Contracts for future transactions
How do commercial banks make profit?
The difference between the interest from borrowed money, and the interest paid on invested money
What are the types of shares?
- Ordinary shares
- Preference share
Ordinary shares:
Get voting rights at the annual meeting
Preference shares:
No voting rights but a dividend before the other share holders.
Assets definition:
Everything the business owns
Liabilities definition:
Everything the business has borrows or owes to other people. What the business owes is in two parts: the capital and the liabilities
What’s the difference between capital and liabilities (balance sheet)?
The capital is the amount owed to the owner(s). The liabilities are the amounts owed to everyone else
What factors affect the success of monetary policy?
- Time lags
- Previous interest rates
- Interest elasticity of goods and services
- Uncertainty
- Reliability of economic data
- Proving links between economic variables
- Judging success
- Other policies in use
How do previous interest rates affect the success of monetary policy?
- They might already be so low that they can’t be decreased any more
- People might have already borrowed the most they can, whatever the interest rate
Reserve ratio definition:
The amount of money that banks can’t lend
Sight savings account definition:
Money can be withdrawn any time
Time savings account definition:
Notice must be given when withdrawing money
What type of savings account is tax free?
ISAs
Loanable funds definition:
Sum total of all the money people and businesses in an economy have decided to save and lend out to borrowers as an investment rather than use for personal consumption
