week 4 Flashcards
what re the four functions of money?
money is a medium of exchange to buy or sell
money is a unit of account to measure prices
money is a store of value to save for later
money is a standard of deferred payment to buy a good now but pay for it later
what is the money supply?
value or quantity available in the economy
what is monetary policy?
the central bank controlling the money supply or the price of money. this can be done by altering the interest rates
what is M0?
known as the monetary base
this is the banks and coins in circulation plus banks operational deposits with the bank of England
what is M4
known as the money supply or stock includes notes and coins in circulation, retail deposits, time deposits ( an investment where a sum of money is held for a specific period, earning a fixed interest rate) and deposit to the banks
what is liquidity
the degree in which assets can be converted to money.
M0 is the most liquid and m4 is the least
what is a financial asset?
assets are assets that derive their value from a contractual right or claim, like ownership in an entity or the right to receive future payments. They represent a promise of future value, unlike physical assets like property, which have inherent value.
they s entitle the owner to a specified stream of interest payments for a specified period this is known as asset yields.
what are examples of financial assets?
Examples include cash, stocks, bonds, and bank deposits.
as a financial assets what are treasury bills, commercial bills
Short-term assets paying no interest directly but with a known date of repurchase by the
original borrower at a known price
A commercial bill with value 100 will be redeemed in one year for 100, so it is now sold at a
price of 99
what are bonds?
▶ Long-term assets which pay a fixed coupon payment per annum over a fixed lifetime until
redemption
▶ A 20 year bond of value 100 with a coupon payment of 10 will pay 10 per annum to the
holder until it is redeemed after 20 years
what and who are financial intermediaries
specialise in bringing borrowers and lenders together
▶ Commercial banks and building societies are financial intermediaries
- Financial intermediaries
▶ Minimise the cost of borrowing funds
▶ Minimise the cost of monitoring risks
▶ Spread risks
how do commercial banks divide their funds
▶ Reserves ( include cash in vault and deposits at the bank of England)
▶ Loans
how is the money supply affected by the amount deposited in banks and the amount of loans that bank issues?
- The money supply is affected by the amount deposited in banks and the amount of loans
that banks issue
▶ Deposits into a bank are recorded as liabilities
▶ The fraction of total deposits that a bank has to keep as reserves is called the reserve ratio r
▶ Loans are issued from excess reserves
▶ These loans become an asset to the bank
