1
Q
What are the 4 main roles of the central bank
A
- lender of last resort
- banker to the government
- regulate the financial sector
- implement monetary policy
2
Q
How can a central bank combat high inflation
A
- raising interest rates
- tightening monetary policy
- intervening in the currency market
3
Q
What two key areas does the Bank of England operate in
A
- keeping inflation in line with the target
- maintaining financial stability through monitoring the financial sector
4
Q
What is a central bank
A
a monetary authority and major regulatory bank in a country responsible for maintaining financial stability
5
Q
What is a base interest rate (bank rate)
A
the main interest rate set by a central bank
6
Q
What 4 factors are considered when setting a bank rate
A
- rate of growth of real GDP
- forecasts of price inflation
- movements in consumer and business confidence
- financial market conditions
7
Q
What is a lender of last resort
A
When central banks provide money to banks and other institutions who are unable to provide loans - prevents liquidity crises
8
Q
Why is a lender of last resort important
A
it helps to maintain financial stability
9
Q
What are the roles of the central bank as a bank for the government
A
- issuing government bonds
- managing government debt
10
Q
What is quantitative easing
A
the creation of new money to purchase government bonds or other financial assets which increases money supply to boost spending.
11
Q
What are two effects of quantitative easing on financial markets
A
- increased liquidity as there is a larger supply of money
- exchange rate depreciation as a larger supply of money can cause a decrease in currency value.
12
Q
What is the FCA
A
the financial conduct authority
13
Q
What is the role of the FCA
A
- protecting consumers by ensuring products and services are fair
- market supervision - they monitor financial markets to identify risks and emerging issues
14
Q
What is the PRA
A
the prudential regulation authority
15
Q
What is the role of the PRA
A
- supervision of banks to assess and ensure they are financially secure
- set and enforce prudential standards / requirements they must meet.
16
Q
What are two ways financial regulators can reduce the risk of bank failure
A
- advancing with technology
- enhancing risk supervision
17
Q
What is the MPC
A
monetary policy comittee
18
Q
What is the role of the MPC
A
- Setting interest rates to control inflation
19
Q
What was the 2008 global financial crisis
A
Was a severe economic downturn triggered by the collapse of the US housing market and subprime mortgage market
20
Q
What is a subprime mortgage
A
A high risk loan offered to users with low credit scores or limited ability to repay
21
Q
Why was the 2008 global financial crisis significant
A
it caused a worldwide recession, the collapse of banks led to less investment and rising unemployment leading to government intervention
22
Q
How did asymmetric information contribute to the 2008 financial crisis
A
mortgage originators and banks had more information about the risks of subprime mortgages than the investors purchasing them.
23
Q
How did moral hazard lead to risk behaviour in the 2008 financial crisis
A
financial institutions believed they were “too big to fail” so they took larger risks for short term gains.
24
Q
What is systemic risk and how did it affect banks in 2008
A
when something affects the entire market - the banks were highly interconnected so if one failed it meant the others could be triggered to fail.
25
How did subprime mortgages increase the risk of a crisis
they were highly interconnected risk and unlikely to be repaid so they failed when housing prices fell
26
Why did weak regulation allow the crisis to develop
It meant banks took larger unnecessary risks.
27
What was the effect of the financial crisis on banks
many banks had to be bailed out or failed because of massive losses on loans and issues with liquidity.
28
What was the effect of the financial crisis on firms
a credit crunch means its harder for businesses to secure finance, there was also a significant fall in demand so businesses couldn’t sell as much stock this lead to widespread business closures.
29
What was the effect of the financial crisis on households
There was a decrease in the value of peoples wealth with households seeing homes drop in value and increased rates of unemployment
30
What happened to government finances during the 2008 financial crisis
finances deteriorated rapidly with the budget deficit in the UK quadrupling to over £150 billion driven by bank bailouts
31
What happened to unemployment in the 2008 financial crisis
it increased
32
What happened to GDP in the 2008 financial crisis
it decreased
33
What is a bank bailout
The provision of government funds or financial assistance to a bank at the brink of failure
34
what are the advantages of a bank bailout
- removes systemic risk
- protects depositors and investors
- stimulates economic activity
- protects wider financial market
35
What are the disadvantages of a bank bailout
- moral hazard
- market inefficiency
- “too big to fail mentality”
36
What is nationalisation
When the government takes control of private sector assets, industries or companies
37
What is part nationalisaiton
When the government has significant stakes in a private business
38
Why was nationalisation used as a response to the 2008 financial crisis
to prevent systemic failure and to restore market confidence.
39
What monetary policy responses where adopted during the 2008 crisis
- interest rates slashed
- quantitative easing
40
Why were interest rates cut down during the 2008 financial crisis
An extremely low interest rate is used to make borrowing cheap is that more investment is made and the economy is stimulated.
41
Why was quantitative easing implemented in during the 2008 crisis
more money in the economy means asset prices are boosted and interest rates are lowered further
42
What fiscal policies did the UK use in the financial crisis
temporary tax cuts - a VAT reduction by 2.5%
Increased public spending - around £3 bill spent on transport
43
What is the FPC
the financial policy committee
44
What is the role of the FPC
They identify and act upon systemic risks
45
What regulatory changes were introduced after the 2008 crisis
They implemented 3 main organisations: the FPC, PRA and FCA
46
What is a financial market
a place where buyers and sellers come together to trade financial assets
47
What are the 4 main purposes of a financial market
- allocation of capital
- risk management
- price discovery
- economic growth
48
How do financial markets help with the allocation of capital
they ensure capital is allocated efficiently throughout the market.
49
How do financial markets help with risk management
it is a platform for risk transfer where participants can hedge against risks.
50
How do financial markets help with price discovery
they help to determine the prices of assets
51
How do financial markets help with economic growth
It provides firms with capital which can help fuel growth
52
What is the main goal of a financial market
match buyers and sellers to efficiently allocate financial capital to its most productive uses
53
What are the 4 types of financial market
- bond market
- stock market
- currency market
- mortgage market
54
What is a money market
a market for short term, highly liquid debt securities
55
What is a capital market
a market for long term debt and equity securities
55
What is a foreign exchange (currency) market
a Market where currencies are bought and sold
55
What are the 4 characteristics of money
- medium of exchange
- unit of account
- store of value
- standard of deferred payment
56
what are the 4 functions of money
- facilitating exchange
- unit of measurement
- store of value
- standard for debt settlement
57
What is money supply
the total quantity of money that is available for transactions.
58
what is narrow money (M1)
Represents the most liquid components of the money supply, including physical currency (used day to day)
59
What is Broad money (M2 and M3)
this includes a wider range of savings and time deposits as well as other near money substitutes.
60
What is digital money
A form of currency that exists solely in electrical or digital form
61
What is debt finance
is borrowing money - this requires paying interest and you may need security
62
What is equity finance
finance from shareholders through issuing new shares or stock (with voting rights)
63
what is a main difference between equity and debt finance
Debt represents borrowing by individuals and organisations whereas equity is ownership in a business or asset
64
What is a bond
bonds allow companies or governments to borrow money from investors - buying a bond lends money to the issuer
65
What are the two types of bond
corporate bond and government bond
66
What are the basic steps of a bond
A bond is a loan - repaid when the bond matures - also pays annual interest market trades the bond issue after
67
What is the relationship between a bond price and a bond yield
an Inverse relationship
67
Why do 10 year bonds differ between countries
inflation risk - countries with higher inflation will have higher bonds to compensate for the loss of real purchasing power
default risk - countries with higher debt will have higher bonds to compensate for risk
68
What are the effects of rising bond yields on government debt
currency appreciation - high bond yields may attract inflows of financial capital
debt service cost - the government will have to pay more for interest on its debts.
69
What are investment banks
banks that are specialised in activities related to capital markets
70
What are the two ways investment banks make profits
- mergers and acquisitions advisory - provide advisory services - earn fees as a percentage of transaction value
- trading and sales - engage in trading activities like shares, bonds (etc)
71
why are hedge funds viewed as high risk
They use high risk strategies like borrowing and tend to aim to generate returns that are not correlated with the overall market
71
What is a hedge fund
are investment vehicles that pool money from a group of investors and use investment strategies to develop returns
72
What are the main functions of commercial banks
- Accepting deposits
- Providing loans
- Payment services
- Safekeeping of valuables
- Currency exchange
73
What are seen as assets in a commercial banks balance sheets
- cash and reserves
- loans and advancements
- investments
74
what are seen as liabilities in a commercial banks balance sheets
- deposits
- borrowing
- capital
75
What is a limitation of credit creation
- the profitable lending opportunities vary throughout the business cycle.
76
How do banks create credit
When banks lend out a proportion of funds, they deposit them in other banks, creating a chain reaction of lending and increasing the money supply
77
What is a non performing loan
is where the borrower has stopped making payments and is in default - when it is more than 90 days overdue
78
What are the two causes of a non performing loan
- economic downturns - more people will find it harder to repay loans
- fraud - people may fake financial information to obtain a loan
79
What are the reasons for bank failure
- poor management - too many risks are taken
- run on the bank - too many people remove their money at the same time
- lack of diversification - staying in the same market so all assets are at risk
80
What is a credit crunch
A period when the availability of credit from banks decreases making it harder for businesses to borrow
81
What are reasons for allowing banks to fail
- prevents moral hazard as people don’t take excessive risks
- promotes competition because competitors can take their place when they leave the market
82
what are arguments for bank bailouts
- prevents systemic risk - financial market is unlikely to collapse
- protects depositors
83
What is market failure
when the price mechanism fails to allocate resources efficiently
84
how does market failure lead to welfare loss
A net loss of surplus (both consumer and producer) because the socially optimum level is not reached
85
What is market rigging
When a group of people illegally manipulate market prices or volumes for personal gain
86
What is a speculative bubble
When asset prices are driven up rapidly due to speculation and herd mentality rather than actual value
87
What is a real life example of a speculative bubble
- crypto currency
- housing bubbles
88
What are the 5 stages of a financial bubble
1 - displacement stage
2 - prices boom
3 - euphoria
4 - profit taking stage
5 - panic
89
What is herd behaviour
when individuals act in a certain way because others are acting like that
90
What is hot hand fallacy
the cognitive bias that if someone is successful they will be again so they may start to expect positive trends and invest randomly
91
How can hot hand fallacy worsen bubbles
Investors believe their recent positive performance will continue indefinitely so may have overconfidence and take large risks
92
What is asymmetric information
when there is an imbalance of information between agents
93
What is insider information
material non public information - which can provide an advantage
94
Why is insider information illegal
an unfair advantage
95
What is moral hazard
when an organisation takes greater risks than they should due to insurance or government covering risks
96
What is a financial crisis
a major disturbance or shock to financial markets - falling asset prices
97
What are the main types of financial crisis
- currency crisis
- external debt crisis
- banking crisis
Etc
98
What are three causes of market failure
- macroeconomic and financial policy failures
- structural changes to the global economy
- financial market failures / behavioural finance
99
What is a credit rating agency
an agency that provides credit ratings for entities based on the likelihood that they will repay their debts.
100
Why were credit rating agencies criticised during the global financial crisis
- they overrated subprime mortgages
- conflict of interest
- slow reaction
101
What are slime reasons banks can fail
- poor management
- bank runs
Economic downturns
102
What are some macroeconomic effects of bank failure
- less consumption and investment
- decline in output and GDP growth
103
What is credit risk
The potential for loss if the borrower does not meet the standards e.g. repay the loan
104
What is liquidity risk
the risk for a firm to not meet its immediate short term cash obligations
macro economics
flashcards
Decks in class (29)
# Cards
-
circular flow of income17
-
measures of economic activity26
-
production possibility frontier (PPF)32
-
aggregate demand23
-
investment and spending18
-
pre learning week 524
-
pre learning week 66
-
multiplier5
-
aggregate supply33
-
Macroeconomic equilibrium and objectives16
-
Meaning and representation of economic growth12
-
Economic growth34
-
Output gaps and the trade cycle17
-
inflation and deflation18
-
benefits & costs of inflation16
-
sectors of the economy5
-
long run aggregate supply11
-
Multiplier24
-
PPP6
-
GDP and standards of living7
-
inflation and deflation6
-
CPI7
-
inflaation7
-
Specialisation and pattern of trade19
-
Trading Blocs6
-
Theme 4 revision78
-
Theme 462
-
UK - case study7
-
4.4108
