monetary policy Flashcards
what are the four functions of money
- a medium of exchange
-a measure of value
-a store of value
-method of deferred payment
what is the money supply
the stock of currency and liquid assets in the economy
what is narrow money
physical money and deposits and liquid assets in the bank
what is broad money
the entire money supply
what is the money market
the market in which liquid assets are traded, used to borrow and lend in the short term
capital market
where debt and capital instruments are bought and sold
what is the foreign exchange market
the market where currencies are traded mainly done by international banks
roles of financial markets in the wider economy
-to facilitate saving
-lend to businesses and individuals
-to provide markets with currencies and commodities
-provide market for equities
what is debt
money which has been borrowed from the bank, and the loan is later repaid with interest rates
what is equity
a stock or security which represents interest in owning e.g a firm,car or house
why is there an inverse relationship between market interest rates and bond prices
-when a bond is bought, money is lent to the borrower
-if the interest rate falls, the bond is worth more as it carries a higher IR than current market conditions and vice versa
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what is a coupon
bond interest payment
what is the maturity of a bond
the time the financial asset is outstanding
ways in which firms raise finances
issuing coroporate bonds
issuing shares
borrowing from a bank
why are corporate bonds isued
to fund large projects
-develop a product
-expand firm
-takeover another firm
what to do commercial banks do
-manage checkes, loans and deposits for individuals and firms
what do investment banks do
-facilitate the trade of stocks, bonds etc
4 main functions of commercial banks
-accept deposits
-provide loans
-provide overdraft
-investment of funds
what does the commercial banks balance sheet show
the value of a companys assets, liabilities and owners equity
3 main objectives of a commercial bank
-liquidity
-profitability
-security
main object - liquidity
how easy it is to turn the assets into cash, in order to be profitable banks must have cash
if liquidity is prioritised, profits will be low
cash is the most liquid
loans and long term bonds are the least liquid
if banks can borrow easily they will keep less liquid
main objective - profitbailty
to be able to pay their depositers interest, wages and general costs. lots of funds in cash means profitabilty is limited
liquidity and safety are more prioritised
main objective - security
have to try and maintain the safety of their assets
banks face uncertainties such as if loans will be repaid or not and in what time
a bank has to keep high portions of their liquid to itself and the central bank
banks only hold their safest assets so more credit cannot be created
how do banks make credit
- M1 money includes checkable deposits
-must keep enough money to meet liabilities, and the rest it can lend
-there a multiple banks in system, so only required to hold a fraction of deposits, and rest ends up in other banks
-this increases the money supply