Topic 6 Key Terms

Question 1

Bank liquidity

Answer 1

The amount of cash banks are required to hold in relation to the amount they have in customer deposits.

Question 2

Bank rate

Answer 2

The interest rate that the Bank of England uses when it lends money to other banks. Financial services providers take account of the Bank rate when they decide how to set interest rates on their own products.

Question 3

Commodity

Answer 3

Goods that share the same characteristics wherever they are produced and whoever produces them – unlike a manufactured product, where different manufacturers can add specific features. Examples include raw materials such as iron ore, gold and silver, or agricultural produce such as wheat and rice.

Question 4

Corporate bond

Answer 4

A product that companies can use to borrow money over periods of five years or more. The company offers a number of bonds for sale; buyers can then sell the bonds on to other investors if they wish. A key difference between bonds and shares is that bondholders do not own a share in the company.

Question 5

Corporate social responsibility

Answer 5

Any action or project in which a company goes beyond the interests of its shareholders and senior management in order to benefit other stakeholder groups, normally with either a social or an environmental purpose. Also known as citizenship or sustainable responsible business.

Question 6

Creditor

Answer 6

Person or organisation to which a debtor owes money.

Question 7

Debtor

Answer 7

A person who owes money.

Question 8

Emerging market

Answer 8

A nation in the process of rapid economic growth and involvement in international trade.

Question 9

Ethical brand

Answer 9

A brand that emphasises issues such as its sustainable, socially responsible approach to production and marketing – this might include limiting the impact on the environment or not exploiting workers. In financial services terms it can mean a product that is not targeted at unsuitable customers.

Question 10

European Commission

Answer 10

The executive body of the European Union responsible for proposing legislation, implementing decisions, upholding the Union’s treaties and day- to-day running of the EU.

Question 11

Exchange rates

Answer 11

The price of one currency in terms of another; eg it enables people to calculate how many US dollars can be purchased with one pound sterling.

Question 12

Gilts

Answer 12

A bond issued by the UK government – it is a way for the government to borrow money. Most gilts are issued with a redemption date, ie the date at which the government agrees to buy them back. Between their issue and the redemption date, the gilts can be traded.

Question 13

Global warming

Answer 13

A gradual increase in the overall temperature of the earth’s atmosphere thought to be caused by humans.

Question 14

Globalisation

Answer 14

The integration of economies, industries, markets, cultures and policy-making around the world.

Question 15

Gross domestic product

Answer 15

The total value of goods produced and services provided in a country during one year.

Question 16

Inflation

Answer 16

A general rise in prices, which means that the purchasing power of money falls.

Question 17

Interest rates

Answer 17

The amount, expressed as a percentage, that a financial services provider charges a borrower when it lends money, or pays to a saver

Question 18

International Monetary Fund

Answer 18

An international body of 189 countries that aims to promote international co- operation on exchange rates and other economic matters.

Question 19

Monetary Policy Committee

Answer 19

The Bank of England committee responsible for keeping inflation under control by the manipulation of interest rates.

Question 20

Offshoring

Answer 20

The practice of moving some of a company’s operational functions to overseas locations.

Question 21

Outsourcing

Answer 21

The process of one provider paying another to carry out certain functions that it would normally do itself.

Question 22

Productivity

Answer 22

How much is produced for a given effort or amount of input. For example, productivity increases if one worker produces 10% more goods in a week.

Question 23

Project Merlin

Answer 23

The project that resulted in an agreement between the government and the main banks to pay lower bonuses to their employees and make more money available for business loans.

Question 24

Protectionism

Answer 24

Government policies designed to protect a country’s own businesses and workforce. For example, imposing taxes on goods made overseas might mean that goods produced in the home country are less expensive and so consumers will be encouraged to buy home-produced goods rather than imported ones.

Question 25

Public sector debt

Answer 25

The amount the government has to borrow to bridge the gap between the income it receives (eg from taxation) and the amount it spends (eg on services such as the NHS).

Question 26

Recession

Answer 26

A period of at least six months in which the amount of goods and services the country is producing is shrinking.

Question 27

Reshoring

Answer 27

The term given to bringing back functions that were once offshored.

Question 28

Sub-prime mortgage

Answer 28

A type of mortgage that is normally taken out by those with low credit ratings and is therefore more likely than the average mortgage not to be repaid.

Question 29

‘Too big to fail’

Answer 29

A phrase used frequently during the 2007–08 financial crisis. It expresses the idea that the consequences of one or more of the big banks failing would be so economically disastrous that no government could allow it to happen.

Question 30

Toxic debt

Answer 30

Debt that has a low chance of being repaid with interest.