Economics unit 1 - the role of money and financial markets

Money

Anything that is acceptable as a means of payment for goods and services

Medium of exchange

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

Financial sectors

Consists of financial organisations and their products involves the flow of capital

Banks

Financial institutions licensed to receive deposits and make loans

Building societies

Mutual financial organisations that are owned by their members

Centrel banks

Issue bank notes, control monetary policy, provides stability, manages the country’s foreign reserves, acts as a bnk for the gov and commercial banks, sets the bank rate

Commercial banks

Accept and pay interest on deposits, make payments for customers, make payments by accepting cheques, issue loans for individuals and firms, provide foreign currencies, offer safe deposit boxes

Investment banks

Help with specialist needs: in mergers and takeovers, underwriting share issues, with international trade including financial conditions in new markets

Insurance

Is a contract, represented by a policy, in which an individual or organisation receives financial protection, or reimbursement against losses, from an insurance company

Importance of the financial sector

Credit provision, Liquidity provision, risk management

Saving

Is the part if an individual’s income which is not spent on consumption

Borrowing

Is receiving money in exchange for an obligation to pay it back at a specified time in the future

Investment

Is the purchase of capital goods that are used to produce future goods and services. It is also an asset purchased to provide income in the future and/ or to be sold for profit

Effect of interest rate on borrowing/saving

Increased interest rates, the cost of borrowing increases, the reward for saving increases