The role of money and financial markets Flashcards
Define money
Anything that is acceptable as a means of payment for goods and services
Define medium of exchange
Anything that sets the standard of value of goods and services acceptable to all parties involved in a transaction
Define financial sector
Consists of financial organisations and their products and involved the flow of capital
Define banks
Financial institutions licensed to receive deposits and make loans
Define building societies
Mutual financial organisations that are owned by their members
Define insurance
A contract, represented by a policy, in which an individual or organisation receives financial protection, or reimbursement against losses, from an insurance company
Define saving
The part of an individual’s income which is not spent on consumption
Define borrowing
Receiving money (or something of value) in exchange for an obligation to pay it back at a specified time in the future
Define investment
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.
Examples of money
Bank notes, coins, savings account, current accounts
What is medium of exchange?
Anything that enables people to engage in the exchange of goods and services without having to barter
What is the role of the financial sector for the economy?
- 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).
What is the role of banks?
- 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
3 different types of banks:
- Central banks
- Commercial banks
- Investment banks
Factors of central banks
- 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
Factors of commercial banks:
- 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
Factors of investment banks
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)
How do you become a member of building societies?
Save money with them
Factors of building societies
- 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
Factors of banks
- Public limited companies
- Owned by shareholders
- Wide range of services
- Can borrow widely on the money market
The role of insurance companies
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.
Explain the role of life insurance
Pays out money to the surviving family. Intended to help replace the loss of income due to death
Explain the role of general insurance
Insurance for all non-life aspects (property, contents, motor, health, pets etc)
The importance of credit provision for consumers
Can buy now, pay later and therefore increasing consumption