The role of money and financial markets Flashcards

1
Q

Define money

A

Anything that is acceptable as a means of payment for goods and services

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2
Q

Define medium of exchange

A

Anything that sets the standard of value of goods and services acceptable to all parties involved in a transaction

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3
Q

Define financial sector

A

Consists of financial organisations and their products and involved the flow of capital

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4
Q

Define banks

A

Financial institutions licensed to receive deposits and make loans

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5
Q

Define building societies

A

Mutual financial organisations that are owned by their members

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6
Q

Define insurance

A

A contract, represented by a policy, in which an individual or organisation receives financial protection, or reimbursement against losses, from an insurance company

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7
Q

Define saving

A

The part of an individual’s income which is not spent on consumption

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8
Q

Define borrowing

A

Receiving money (or something of value) in exchange for an obligation to pay it back at a specified time in the future

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9
Q

Define investment

A

The purchase of capital goods that are used to produce future goods and services. It is also an asset purchased to provide income in the future and/or to be sold for profit.

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10
Q

Examples of money

A

Bank notes, coins, savings account, current accounts

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11
Q

What is medium of exchange?

A

Anything that enables people to engage in the exchange of goods and services without having to barter

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12
Q

What is the role of the financial sector for the economy?

A
  • The financial sector helps consumers, firms and governments to carry out economic activities, helping the market to work
  • Involves the lending and borrowing of money
  • Banks + building societies enable people who do not need to use money now (savers) to provide it for those who need it now (borrowers). This allows for supply of money (from savers) to equal demand for money (from borrowers).
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13
Q

What is the role of banks?

A
  • Banks are financial institutions licensed to receive deposits and make loans
  • May provide financial services, e.g. wealth management, currency exchange and safe deposit boxes
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14
Q

3 different types of banks:

A
  • Central banks
  • Commercial banks
  • Investment banks
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15
Q

Factors of central banks

A
  • Issue bank notes (supervise the supply of money)
  • Control monetary policy (sets the bank rate which determines all other interest rates
  • Provides financial stability
  • Manages the country’s foreign reserves
  • Acts as the bank for the commercial banks
  • Acts as the bank for the government
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16
Q

Factors of commercial banks:

A
  • Accepts deposits (savings) and pay interest
  • Make payments for customers by mobile phone/ card payments or bank transfers
  • Make payments by accepting cheques
  • Issue loans to individuals and firms
  • Provide foreign currencies for firms and individuals
  • Offer safe deposit boxes
17
Q

Factors of investment banks

A

Helps firms with specialist needs:
- in merges and takeovers
- underwriting share issues (guaranteeing all will be sold)
- with international trade (including financial conditions in new markets)

18
Q

How do you become a member of building societies?

A

Save money with them

19
Q

Factors of building societies

A
  • Mutual organisations
  • Owned by members who are savers with them
  • Provide a limited range of services (mainly savings and mortgages)
  • Limited as to how much money can be borrowed from the money market
20
Q

Factors of banks

A
  • Public limited companies
  • Owned by shareholders
  • Wide range of services
  • Can borrow widely on the money market
21
Q

The role of insurance companies

A

Insurance companies are financial institutions that guarantee compensation for specified loss, damage, illness, or death in return for payments. They pools clients’ risks to make payments more affordable for the insured.

22
Q

Explain the role of life insurance

A

Pays out money to the surviving family. Intended to help replace the loss of income due to death

23
Q

Explain the role of general insurance

A

Insurance for all non-life aspects (property, contents, motor, health, pets etc)

24
Q

The importance of credit provision for consumers

A

Can buy now, pay later and therefore increasing consumption

25
Q

The importance of credit provision for producers

A

Can borrow money to expand

26
Q

The importance of credit provision for government

A

Can run a budget deficit or spend before taxes are collected

27
Q

The importance of liquidity provision for consumers

A

Can borrow to pay later - often against an asset like a house

28
Q

The importance of liquidity provision for producers

A

Banks will provide overdraft facilities so firms can continue trading while waiting for payments

29
Q

The importance of risk management for consumers

A

Allows savers to spread their risk by putting their money into a range of companies, rather than just one

30
Q

The importance of risk management for producers

A

Reduces risk of not receiving payment, especially when exporting, or not receiving on time

31
Q

The importance of risk management for government

A

Allows for vital expenditure even when revenue is uncertain

32
Q

If consumers lack confidence in the economy (due to decrease in the rate of interest) , what will happen to demand/ investment?

A

If consumers lack confidence in the economy then demand may not increase so investment will not increase as interest rates fall.