Topic 1 Flashcards
What is the function for medium of exchange?
facilitates a transaction through a universal exchange accepted by all instead of bartering leaving grey areas and unknowns.
Give an example of medium of exchange.
using cash or card instead of finding a coffee seller who would be willing to trade with the items you have.
What is the function for unit of account?
It gives people perspective on the value of items so that they are comparable and grants a framework for pricing.
Give an example of unit of account.
If the price for bread was £1 and price for eggs is £2 then we can easily see the value for eggs is double the value of bread.
What is the function of store of value?
Money can be saved and retrieved at a later date allowing an individual to be delay consumption therefore it must hold its value.
Give an example of store of value.
if an individual earns £50 today then that individual can save it to buy groceries at a later date provided inflation is not high.
What does sufficient quantity mean?
Sufficient quantity is a property of money as the amount of money needed in day to day transactions and for the economy to function must be enough.
What does general acceptability mean?
General acceptability is when a money is widely accepted by the majority of traders/businesses therefore it is trusted e.g. the British pound is accepted by most if not all businesses in the uk.
What does divisibility mean?
Divisibility is when the money can be easily divided into smaller units for smaller transactions such as a £5 note can be broken down into every possible transaction such as £1.78.
What does portability mean?
Money can be easily transported either in cash or digitally such as bank accounts which allow for quicker transactions.
What does channelling surplus funds mean?
This is when a bank will take an individual/ savers funds and redistribute it back into the economy by lending to borrowers usually for a profit.
What is profit motive?
This is when financial institutions will try to generate profits for their shareholders by providing a service which they can charge a fee for such as interest, account maintenance ect.
What is an alternative objection?
Some financial institutions will prioritise non profit or not profit maximising objectives as they have other motives such as a credit union which will prioritise favourable interest rates and community support.
What is meant by convenience when talking about the benefits of financial institutions?
Financial transactions are simplified by using current accounts as they make the transfer of money simple instead of handling cash.
What is meant by achieving difficult objectives when talking about the benefits of financial institutions?
This is when financial objectives for an individual can be made to be easier due to the products provided by the financial institutions such as a mortgage for a young couple as the monthly payment is much more achievable.
What is meant by protection from risk when talking about the benefits of financial institutions?
Insurance products can help individuals with financial risk when coming to significant life events such as medical bills or protperty loss.
What is the definition of intermediation?
Intermediation is the process in which financial institutions use to facilitate the flow of funds between a surplus party and a deficit party ( a surplus party is a someone with excess funds and a deficit party is those in need of funds).
What do we mean by borrowing and lending when it comes to the role of financial intermediaries?
Financial intermediaries such as banks for credit unions will collect deposits and then lend them out for a profit for example a bank may offer a savings account with 1% interest while they will offer a loan for 5% interest accumulating a 4% profit.
What do we mean by liquidity provision when it comes to the role of financial intermediaries?
The financial intermediaries will allow liquidity in the market by allowing depositors to access their funds even if they have lent out the majority of their funds allowing for economic stability.
What do we mean by information asymmetry when it comes to the role of financial intermediaries?
The financial intermediaries will allow the informational asymmetry to be reduced by giving indicators such as credit therefore the risk of lending to borrowers is reduced and there is trust built between the borrower and the lender.
Name the challenge and the solution for geographic location as an element of intermediation.
Challenge: a borrower and a lender may not be positioned geographically well for example a farmer in need of a loan may not know anyone locally to provide this loan
Solution: the solution found by financial intermediaries is the access to a online or physical bank which can branch the borrower and the lender so both are provided for.
Name the challenge and the solution for Aggregation as an element of intermediation.
challange: indivindual lenders my not have the funds nor trust their borrowers enough to lend out larger amounts to small businesses or even larger corporations
solution: financial intermediaries will pool together smaller accounts from savers to lend out to the businesses/borrowers so that the risk is spread and it is much simpler to raise the funds
Name the challenge and the solution for maturity transformation as an element of intermediation.
challange: Borrowers will often want to borrow for long periods of time whereas the lender will mostly only want to lend for shorter periods of time.
solution: the financial intermediaries will set up fixed term deposits or saving accounts with a good long term interest to encourage the lender to hold the money in the account for as long as possible.
Name the challenge and the solution for risk transformation as an element of intermediation.
Challenge: lenders will be hesitant to lend out to borrowers for reasons such as the fear of not being paid back.
Solution: A financial intermediary will spread the loans given over multiple institutions as well as many borrowers therefore if one defaults the impact is not as great as if it was one lender.
