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Year 11 - Economics > Topic 5 - Financial Markets > Flashcards

Topic 5 - Financial Markets Flashcards

1
Q

Explain the difference between M1 and Broad Money, as monetary aggregates.

Include the factors they cover.

A

M1 is the more narrow form of liquidity, including currency and deposits from private, non-bank sectors.

Broad Money consists of M1, M3, and borrowings by all financial intermediaries from the private sector.
Less liquid monetary aggregate.

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2
Q

What financial aggregate is used as a strong economic growth indicator?

A

Credit growth is the strongest economic indicator of a country, mainly seen in M3.

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3
Q

How do banks earn money?

Charges ____, extends ____

A

Banks earn money by lending out loans, charging interest rates on these loans and extending the credit interests. (Pay later, higher cost)

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4
Q

Define Financial intermediaries.

State an example of one.

A

Firms that receive the funds of borrowers, then make loans to lenders. The financial banking bridge between borrowers and savers.
E.g.: Credit Unions, Banks, etc.

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5
Q

State the four types of lenders (savers) and borrowers (spenders) within the Australian Financial System.

A
  1. Households
  2. Businesses
  3. Governments
  4. Overseas Foreigners
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6
Q

Distinguish between a primary and secondary market.

State 1 example for each market.

A

Primary markets - Facilitates the creation of financial securities that are mainly sold to ‘professional’ investors.
e.g. IPO

Secondary Markets - Buying and selling of financial assets issued from a primary market to a more broad range of customers.
e.g. ASX

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7
Q

List the four main types of financial markets.

S___/E___, D___, D___, F___E___

A
  1. Share/Equity Market
  2. Debt Market
  3. Derivatives Market
  4. Foreign Exchange Market
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8
Q

Explain the Share/Equity Market

A

Where ownership shares in companies are issued or exchanged.

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9
Q

Explain the Debt Market

A

Where debt securities are exchanged, and cash is lent/borrowed between consumers, businesses and ADTI’s.

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10
Q

Explain the Derivatives Market through shares.

List the 4 different types of contracts made from Derivatives.

A

Where people buy and sell financial assets that are base on the value of other financial items/shares, etc. through contracts.
1) Forward 2) Future 3) Call 4) Options

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11
Q

Explain the Foreign Exchange Market

A

Where financial assets defined in one country’s currency are exchanged for assets designed in another countries currency.

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12
Q

Describe the share market and in relation to buyers and sellers.

State the largest one in Australia as well.

A

A regulated, financial market for investors to buy and sell shares. When buyers and sellers agree on an equilibrium price point.

The largest share market in Australia is ASX.

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13
Q

State the 2 reasons for investing in shares.
(D____ and C___ G___)

Briefly explain each reason.

A
  1. Dividends - Proportions of profits that are returned to the shareholders. Awarded on a ‘per-share basis’.
  2. Capital Gain - Profit from the sale of property or investments. Selling shares higher than previously bought.
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14
Q

State the 2 formulas (name + equation) for measuring the value of shares.
(D__ Y__) and (__/__ Ratio)

A

1) Dividend Yield = (Annual Dividend ÷ Price per share)

2) P/E Ratio (Price-per-earning) =
Share Price ÷ Company’s earnings

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15
Q

State the similarity between Australian and global financial markets.
How do these markets raise funds?
(B & D)

A

Linked through the offshore borrowings of ‘all financial intermediaries’.

Both raise funds through bonds and debts.

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16
Q

Explain the economic role of superannuation.

State its importance to the government.

A

Superannuation contributes to saving rates being built up into long-term retirement.

Government taxes these rates, reducing the cost of government spending on social security and welfare.

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17
Q

What is the CFR’s role in Australia’s financial market?
(Council of Financial Regulators)
Which government bodies do they control?

A

A coordinating body for financial market regulation that promotes regulation and stability. Allows information to be shared between RBA, APRA, ASIC and the Treasury.

18
Q

State the RBA’s role in Australia’s economy.
(Reserve Bank of Australia)
List the 3 financial regulations undertaken in order.

A

Prints currency notes and regulates the Australian monetary/banking system.

1) Stabilise Australia’s currency (Inflation rates)
2) Maintain full-employment rates
3) Ensure economic prosperity and welfare.

19
Q

What is APRA’s role in the Australian economy? (Australian Prudential Regulation Authority)

Which 3 areas of the financial system do they regulate?

A 
A government body that oversees and protects financial entities.
Regulates:
1) All deposit-taking institutions
2) Life and general insurance 
3) Superannuation funds
20
Q

State ASIC’s responsibility for the Australian financial market (Australian Securities and Investments Commission).

How do they maintain consumer confidence?

A

Responsible for company regulation, consumer protection and oversight of financial service products.

Maintains consumer confidence by regulating financial offences (jailing, freezing assets, fines).

21
Q

What is the Australian Treasury’s main role to the Australian Government and Australia?

A

The main source of economic policy advice which influences the Australian Budget. They collect taxes and allocate government expenditure, whilst implementing fiscal policies.

22
Q

List the roles which an individual consumer has when it comes to borrowing and lending?
(Roles=What they do with B&L)

A

Borrowing: Mortgage for loans + Short-term transactions.

Lending: Deposits money into financial institutions and invests in shares or property to gain interest or profit.

23
Q

List the roles which businesses have when it comes to borrowing and lending (to shareholders)?

A

Borrowing: Floating new shares to raise capital equity, expand production and invest in research.

Lending: Through dividends, and has no immediate plan to expand.

24
Q

List the roles which the Government has when it comes to borrowing and lending?

A

Borrowing: Borrowing from banks and foreign exchange markets - Raise economic activity and increase spending in the economy. (Long-term investment).

Lending: On a budget surplus - Allows them to pay outstanding debts when revenue is higher than spending.

25
Q

List the roles which International countries have when it comes to borrowing and lending?

A

Borrowing: Provided by overseas finance of other governments exchange rates. Recorded as a foreign liability.

Lending: Increases when there is a shortage of credit, resulting in interest rates rising for bonds, repurchase agreements and Foreign Exchange shares.

26
Q

Define Liquidity and the benefit that individuals receive from it.

A

The ease to convert an asset/security into ready cash. Benefits include gaining rates of return passively when it’s in the bank and using it for everyday transactions.

27
Q

Define Macroeconomics Policies.

List and explain the 2 main policies associated with Macroeconomics.

A

Policies directed at stabilising economic activity and Aggregate Demand (AD).

Consists of Fiscal Policy (Government intervention)
and Monetary Policy (Cash rate on Money Market between ADTI’s)

28
Q

List the 4 outcomes when Aggregate Demand decreases. (Shifts left)
What does it lead to? (D____)

A

1) Decreases economic output/activity
2) Places downward pressure on prices
3) Fiscal Policy Decreases
4) Monetary Policy Increases
Leads to deflation.

29
Q

List the 4 outcomes when Aggregate Demand increases. (Shifts right)
What does it lead to? (I_____)

A

1) Increases economic output/activity
2) Places upward pressure on prices
3) Fiscal Policy Increases
4) Monetary Policy Decreases
Both lead to inflation.

30
Q

Define Inflation.

Outline the government body that measures it and the other government body that indirectly affects inflation rates.

A

The rate of increase for goods and services over time.

Measured by the ABS through the CPI (Consumer Price Index).
The RBA indirectly affect the inflation rates through cash rates.

31
Q

Define the Monetary Policy.

What occurs between A___s when B&L?

A

Involves setting the cash rate in the overnight money market between ADTIs.

Affects ADTI’s through the borrowing and lending of liquid funds through ESA and interest rate corridor.

32
Q

What are the 3 stances which the RBA chooses to implement?

A

1) Tightening stance (CR ↑)
2) Loosening stance (CR ↓)
3) Neutral stance (CR -)

33
Q

State the type of market the Australian Stock Exchange (ASX) is.
Primary or Secondary market?

A

An Equity market, with most transactions occurring in the secondary market (trading of shares).

34
Q

What type of financing occurs when a firm floats new shares on the ASX?
(E____ f_____ in the p____ f____ m____)

A

Equity financing in the primary financial market.

35
Q

If the equilibrium cash rate is BELOW the cash rate target, outline the 1 step that RBA must take to increase it and the 3 effects.

A 
1) RBA sells bonds, 'Repos' and foreign exchange swaps.
Outcomes: 
2) Decrease in liquid funds from ADTIs
3) Shifts supply curve to the left 
4) Cash rate equilibrium rises
36
Q

If the RBA buys securities from ADTI’s, what happens to:
Liquidity (Excess/Shortage)
Cash Rate (↑/↓)

A

EXCESS liquidity in the money market.

Cash rates FALL ↓.

37
Q

In the overnight money market, ADTI’s ESA in surplus = Supply or Demand?
ADTI’s ESA in deficit = Supply or Demand?

A

ADTI’s who have ESA in surplus are the supply of funds.

ADTI’s who have ESA in deficit are the demand for funds.

38
Q

State the Monetary Policy and its correct order from the Reserve Bank Act 1959.

  • S____ of A____ c____
  • Maintence of f__ e_____ in Australia
  • Economic P____ and W____ of Australians
A

1) Stability of Australia’s currency
2) Maintenance of full employment in Australia
3) Economic prosperity and welfare of the Australian people

39
Q

List the 7 factors which result from the RBA ‘tightening’ their monetary policy stance?

State the relationship between all these factors (increase/decrease for which ones?)

A

1) Cash rate ↑ 2) Interest Rates ↑
3) Mortgage repayments ↑
4) Left-over money ↓ 5) Consumer + Business Spending/Borrowing ↓
6) Economic Activity ↓ 7) Inflation ↓

The first 3 follow the stance, the rest are opposite to the stance.

40
Q

List 3 of the main participants in foreign exchange markets.

Options: ASX, Government, Tourists, Speculators, Exporters, Importers, Migrants, Financial Institutions.

A

Government | Speculators | Financial Institutions

Year 11 - Economics (6 decks)

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