The Financial Sector Flashcards
What is the money stock?
The quantity of money that is in circulation in the economy
What are the functions of money?
- A medium of exchange
- A store of value
- A unit of account
- A standard of deferred payment
What are the characteristics of money
- portability
- Divisibility
- Scarcity
- Acceptability
- Durability
Stability in value
What is the money supply?
The quantity of money that is in circulation in an economy
What is liquidity?
The extent to which an asset can be converted in the short term so that it can be spent without incurring the holder cost
What is narrow money?
- known as MO
- Notes and coins in circulation and as commercial banks deposits at the Bank of England
What is broad money?
- known as M4
- Novel money plus Sterling wholesale and retail deposits with monetary financial institutions such as banks and building societies
What is the credit multiplier?
An increase in the money supply can have a multiplied effect on the amount of credit in an economy
What can only make prices increase persistently?
- persistent increase in the money supply
- Money supply grow faster than real output
According to classical economist
What is the quantity of money theory?
Inflation is caused solely by increases in the money supply and can be explained by the Fisher equation of exchange
What is the fisher equation of exchange?
MV= PT
M - size of money stock
V - velocity of circulation (constant)
P - average price level
T - total number of transactions ( constant )
Why does MV = PT
Because MV is the total expenditure in the economy and PT is the total output sold in the economy
Why do households demand money?
- the transactions demand for money
- The precautionary demand for money
- The speculative demand for money
What is the liquidity preference theory?
The total desire to hold money from households and firms
- Is displayed in terms of a demand curve
What is the loanable fund theory?
Household influenced by the ROI in making savings decisions which then determines the amount of loanable funds available for firms to invest with
-supply of loanable funds high if interest is high
- This the we can explain how interest rates are determined
What is the financial sector?
Section of the economy made up of firms and institutions that provide financial services to commercial and retail customers
What are the key roles of the financial sector?
- Facilitate saving
- Facilitate borrowing
- Facilitate the exchange of goods and services
- Operate forward markets - firms can buy + sell in future at a set price
- operate market for equity - ability for shares to be sold in the future
What is the main role of banks?
To act as an intermediary ( bring those together who want to save and borrow)
What are the three main markets in the financial sector?
Money markets : sector of the economy where the borrowing and lending of short-term securities occur
Capital markets : a marketplace for long-term finance
Foreign exchange markets: facilitates the exchange of one currency for another
What are the different forms of borrowing in the financial sector?
Mortgages: type of loan used to finance the purchase of a property
Unsecured loans : a type of loan that is not backed up by collateral
Overdraft : external short-term finance or business
Credit cards :
Payday lending:
Equity finance
Debt finance
What is a share?
Shares represent ownership of the company
What is a
bond?
A bond is a loan to a company that pays investors a fixed rate of return over a specific timeframe
What is the certificate?
A document signifying ownership of a financial security such as a stock or a share
Why do developing economies need investment?
- to enable economic growth
- To tackle poverty
- An increase in productive potential requires investment
LRAS curve would shift to the right
What is a low level equilibrium trap?
low capital Shortage - low capita incomes - low savings - low investment
What is the Harrod Domar model?
A model of economic growth that emphasises the importance of savings and investment
- The productivity of investment is measured by the capital output ratio
Harrod Domar Evaluation
- May not be successful where financial markets are under developed
- Human capital is also critical
- A developing economy may need to have to use external source of funding
What is microfinance
- schemes that provide finance for small scale projects in LDCs
- help those in poverty become self-sufficient
- Overcomes the problem of those people depending on informal market for credit that charge high interest rates and may have a monopoly position
What are the benefits of micro finance?
- Fills saving gap
- Generation of new employment
- Relieved poverty
- Increasing income
What are the problems with micro finance?
- Enterprises are not always successful
- Lawns are small
- Loans may not be used for investment but for personal use
What is an alternative to micro finance?
Finance from abroad
What are remittances ?
Transfers of money by a foreign worker to the home country
What is a central bank?
The banker to the government performing a range of functions and acting as a banker to commercial banks and regulating financial system
What are the functions of central bank?
- issuing notes and coins
- Acting as a banker to the government
and commercial banks - Implementing monetary policy
- Acting as a regulator to the financial system
What are the primary and secondary objectives of a central bank?
- Monetary stability , secondary: stabilise the economy to help achieve the government macro-economic objectives
- Financial stability , secondary: promote the government key macroeconomic objectives
How can a central bank achieve monetary stability?
- through monetary policy
By aiming for low and stable inflation - Can do this by controlling interest rates, influencing the exchange rate
How can a bank achieve financial stability?
- By aiming for an efficient flow liquidity
- Can do this by acting as a lender of last resort
What does a lender of last resort mean?
If there was an equity shortage, the bank can loa -funds as a last resort
Advantages of lender of last resort
- Helps to prevent panic and a run on banks
- Helps to reduce the impact of financial instability
Advantages of lender of last resort
- Helps to prevent panic and a run on banks
- Helps to reduce the impact of financial instability
What contributed to the financial crisis?
- subprime Mortgages
- moral hazard
- Collapse of lending to businesses
- Speculation and market bubbles
- The role of organisational culture
What are the different types of financial market failure?
- Systemic risk: failure in some parts can lead to a collapse of the system
- Market bubbles:
- negative externalities in financial markets
- Asymmetric information
- Market rigging
How can financial markets be regulated?
- Micro Prudential regulation
- Macro Prudential regulation
What is microcrudential regulation?
Ensuring individual firms act fairly towards customers don’t take excessive risk and break the law
What is macro Prudential regulation?
To tackle systemic risk in financial markets and avoid large scale financial crisis
What are the three bodies responsible for financial regulation in the UK?
- Financial policy committee
- The Prudential regulation authority
- The financial conduct authority
Who are the financial policy committee?
- They identify monitor and take action to remove or reduce systemic risk
For example, they require banks and building societies to have countercyclical buffer
Who are the Prudential regulation authority?
- responsible for micro prudential regulation
They provide an appropriate degree of protection for those who are or may become policyholders
Valid
Who are the financial conduct authority?
- Responsible for macro Prudential regulation
Protects consumers of financial services and products
Enhance financial market integrity
What is the world bank?
- International financial institution that provides loans grants and other assistance to developing countries
Aim to reduce poverty and promote economic development
What are the two institutions of the World Bank?
- The international bank reconstruction and development (aimed at middle income countries)
- The international development association (aimed up poor countries)
What are the advantages of the world bank?
- Provides funding for development projects
Promotes economic growth - can share knowledge and expertise
What are the disadvantages of the world bank?
- Conditionality: attaching conditions to loans which don’t match the needs of the recipient countries
- Environmental and social impact : phone that have negative environment and social impacts
Who are the international monetary fund?
- A multilateral organisation set up with the brief of ensuring the stability of the international monetary system
Objective is to offer short-term assistance to countries experiencing balance of payments problems
What are the roles of the IMF?
- Promote international monetary cooperation
- Facilitate expansion of international trade
- Assist in setting a multilateral system of payments
Advantages of the IMF
- Provides financial assistance
- Promote macroeconomic stability
- monitors economic developments (can source out problems)
- promote global cooperation
Disadvantages of the IMF
- Conditions of loans
- Devaluations
- Free market criticisms
- Lack of transparency
