2.8 - The Role of Money and Financial Markets

Anything that is generally accepted as a means of payment for goods and services.

• A card which allows money, in the form of banks deposits in current accounts, to be transferred between buyers and sellers.

• If you don't have enough money, you can't buy the product.

• There is no charge to the seller for accepting these cards in payment.

• They enable the holder to spend money now and to pay it back at a later point in time.

• If you cannot pay it all back, you are interest on the amount outstanding.

• Retailers are charged for allowing you to use these cards in payment.

No.

The ‘double coincidence of wants' , or the need to find someone who has products you want and is willing to exchange for your goods and services.

No.

Anything that sets the standard of value of goods and services acceptable to all parties involved in a transaction.

Because it's generally accepted as the means of buying and selling products.

The financial sector consists of financial organisations and their products and involves the flow of capital.

It helps markets to function and consumers, firms, and governments to carry out economies activities.

• This is usually done through the lending and borrowing of money, both in the short and long run.

• This is done by financial intermediaries.

  • Banks

They link consumers, firms, and governments in allowing money to be moved from those who do not need to use it immediately (savers) to those who want to use it now (borrowers).

• It allows for a good use of all funds.

• Adds to the efficient organisation of the economy.

A healthy financial sector is important for a stable economy.

• The central bank

• Commercial banks

• Building societies

• Insurance companies

• Issuing bank notes.

• Control monetary policy by setting the bank rate.

• Provide financial stability.

• Manage the country's foreign reserves.

• Act as the bank for the commercial banks.

• Be the bank for the government.

The interest rate set by the Central Bank, from which all other interest rates are calculated.

To take savings/deposits from customers and to turn them into assets for the banks.

• This is done by investing or lending savers' money.

• This makes the bank gain a higher rate of interest than that which they are paying savers.

• Savers - lower than base rate

• Borrowers - higher than base rate

• Accept deposits and pay interest on them.

• Keep savings safe.

• Make payments on behalf of their customers by cheque, card payments, etc.

  • This is important as fewer notes and coins are used for purchases now.

• Issue loans to individuals and firms.

• Provide overdraft facilities.

• Offer safe deposit boxes for very expensive items.

Amounts of money that a bank gives a customer for a set period of time, on which interest is charged.

When a bank allows a current account holder to use money even though it is not in their account.

Mutual institutions where their members, the people who save money with them, own them.

• Rights to attend and speak at meetings.

• To vote on issues.

• Each member has one vote, regardless if their invested or borrowed money.

A mortgage is a financial agreement to borrow money in order to purchase a house.

Provide ssavint products and mortgages for their members.

• Banks are normally public limited companies.

• Banks are normally listed on the stock market.

• Banks are owned by shareholders who have voting power in line with the number of shares they own.

Yes.

Financial Institutions that guarantee compensation for specified loss, damage, illness, or death in return for an agreed payment (called premiums).

• Life Insurance

• General Insurance

Pays out money to the surviving family if the person insured dies.

• Whole-of-Life

  • Paid out whenever the person dies as long as the premiums have been paid.

• Term Life Insurance

  • Cover the person for a specific period only.

Insurance which covers all non-life policies.

Includes:

• Property

• Contents

• Motor

• Health

• Pets

• Etc.

Intended to help replace the loss of income due to the death of the person insured.

Spreads the risk of loss across all insurwnce holders.

• Credit Provision

• Liquidity Provision

• Risk Management

• Allows them to live beyond their means and run up very large debts.

• Allows them to buy now and pay later, increasing consumption.

• The provision of mortgages allows far more consumers to buy their own home.

• They can borrow money from financial institutions to enable them to grow, without having to first save all the necessary money.

• Enables them to spend money even when tax revenue hasn't yet been collected.

• Enables them to spend more than they intend to raise in taxes.

Allows them to continue to function when faced with unexpected demands for cash.

• Overdrafts

Allows them to pool their risks from exposure to financial markets.

• A professional finance manager will take savings from a range of customers and invest in a range of companies.

  • This ensures that if one does less well, the savers will not lose all their money.

• A rise in interest rates offered to savers will encourage people to increase their level of savings.

• A fall will result in people reducing their levels of savings.

• Higher interest rates increase the cost of borrowing.

  • Both firms and individuals will borrow less.

• Individuals will be encouraged to save rather than spend with a rise in interest rates.

  • They will purchase fewer goods/services.

  • This deters firms from borrowing as their revenue will fall.

• A rise will lead to an increase in the foreign exchange value of the pound.

  • If the pound rises, exports are less competitive so firms will sell less and once more reduce borrowing.

• A fall in the rate of interest means that:

  • the cost of borrowing has gone down - cheaper to borrow for investment.

  • Lower opportunity cost involved in sacrificing saving.

  • Consumers are encouraged to spend and therefore, firms will want to expand in order to meet this expended rise in demand.

• The level of investment is inversely related to the rate of interest.

• If firms and consumers lack confidence in the economy, firms ight not increase investment, as they do not expect more demand.