Macroeconomics, part 8- Financial Markets and Monetary Policy

Question 1

What are the characteristics of money?

Answer 1

• Durability
• Portability
• Divisibility
• Uniformity
• Limited supply
• Acceptability

Question 2

What are the functions of money?

Answer 2

-Medium of exchange
-Measure of value
-Standard of deferred payment
-Store of value
Money it has functions four, medium, measure, standard, store

Question 3

Current account definition:

Answer 3

Cash can be withdrawn immediately so these perform the functions of money

Question 4

Savings account definition:

Answer 4

Can’t withdraw cash immediately so doesn’t act as a medium of exchange, but does act as store of value

Question 5

Reasons for charging interest on a loan:

Answer 5

• Admin fee
• Counteract inflation
• Reward for risk

Question 6

Deposit guarantee scheme:

Answer 6

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.

Question 7

External sources of finance definition:

Answer 7

Finance provided by people or institutions outside the business. Creates debt that will require payment

Question 8

Sources of long term finance:

Answer 8

External:
-Long term loans
-Issue shares
Internal:
-Sale and leaseback
-Retained profit

Question 9

Rights issue definition:

Answer 9

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

Question 10

Shares for a private company (Ltd):

Answer 10

Not traded in a market

Question 11

Shares for a public company (Plc):

Answer 11

Traded on the stock market

Question 12

Advantages of shares:

Answer 12

• No need to repay the money invested
• Cheaper than a loan
• Some businesses can raise large sums of money

Question 13

Disadvantages of shares:

Answer 13

• 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

Question 14

Money market:

Answer 14

Market for loans. The price of the loans in the interest rate

Question 15

Loanable funds theory:

Answer 15

• 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

Question 16

Capital markets:

Answer 16

The part of the financial system concerned with raising capital by dealing in shares, bonds and other long term investments

Question 17

Primary market:

Answer 17

Initial public offering of shares. Also known as floatation

Question 18

Secondary market:

Answer 18

Buying and selling existing shares

Question 19

Spot market:

Answer 19

Buying and selling currencies

Question 20

Forward market:

Answer 20

Contracts for future transactions

Question 21

How do commercial banks make profit?

Answer 21

The difference between the interest from borrowed money, and the interest paid on invested money

Question 22

What are the types of shares?

Answer 22

• Ordinary shares

- Preference share

Question 23

Ordinary shares:

Answer 23

Get voting rights at the annual meeting

Question 24

Preference shares:

Answer 24

No voting rights but a dividend before the other share holders.

Question 25

Assets definition:

Answer 25

Everything the business owns

Question 26

Liabilities definition:

Answer 26

Everything the business has borrows or owes to other people. What the business owes is in two parts: the capital and the liabilities

Question 27

What’s the difference between capital and liabilities (balance sheet)?

Answer 27

The capital is the amount owed to the owner(s). The liabilities are the amounts owed to everyone else

Question 28

What factors affect the success of monetary policy?

Answer 28

• 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

Question 29

How do previous interest rates affect the success of monetary policy?

Answer 29

• 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

Question 30

Reserve ratio definition:

Answer 30

The amount of money that banks can’t lend

Question 31

Sight savings account definition:

Answer 31

Money can be withdrawn any time

Question 32

Time savings account definition:

Answer 32

Notice must be given when withdrawing money

Question 33

What type of savings account is tax free?

Answer 33

ISAs

Question 34

Loanable funds definition:

Answer 34

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