2.8 The role of money and financial markets

1. MONEY

anything that is accepted as a means of payment for goods and services

2. FINANCIAL SECTOR

consists of financial organisations and their products, and involves the flow of money

3. INVESTMENT

the purchase of capital goods that are used to produce future goods and services

4. RATE OF INTEREST

the cost of borrowing money and the reward for saving

5. THE CENTRAL BANK

known as the Bank of England in the UK

6. THE ROLES OF THE CENTRAL BANK

issue bank notes, control monetary policy, provide financial stability, manage the country’s foreign reserves, bank to the commercial banks, bank for the government

7. COMMERCIAL BANKS (RETAIL BANKS)

these are the High Street banks such as HSBC, NATWEST, BARCLAYS etc

8. BASIC ROLE OF COMMERCIAL BANKS

to take deposits (savings) from customers and create assets such as loans to other customers (eg mortgage)

9. BUILDING SOCIETIES

a mutual financial institution (owned by its members such as savers) whose main aim is to receive deposits from its members and to lend money for members to purchase property. An example is the Nationwide Building Society

10. MORTGAGE

a loan to purchase a property

11. INSURANCE COMPANY

a financial institution that guarantees compensation for specified loss, damage, illness or death in return for an agreed premium. An example is AVIVA

12. THE ROLES OF THE FINANCIAL SECTOR

credit provision, liquidity provision, risk management