MACRO- Financial markets

what are financial markets?

any place where buyers and sellers meet to trade financial assets

who is involved in the financial markets?

• lenders

• borrowers

• intermediaries

what are examples of lenders?

• savers

• investors

what are examples of borrowers?

• individuals

• firms

• government

what are some examples of intermediaries?

• commercial banks

• investment banks

• pension funds

• hedge funds

• mutual funds

what are the different markets within the financial market?

• money markets

• capital markets

• currency markets

what is the money market?

Financial assets with a payback date of a year of less.

What is debt capital?

Any financial asset which pays back an interest rate, a form of borrowing. (Bonds)

What is equity capital?

Having a share of a firm, the return is not interest rate but a dividend (share of the profit).

What is a capital market?

Financial assets that have a payback date greater than a year.

What is primary capital markets?

Brand new bonds made by investment banks and for the UK the debt management office.

What is secondary capital markets?

secondary capital market is where people buy and sell shares that already exist.

what are the markets involved in the capital market and their definitions?

• Spot markets: Buying currency at the current exchange rate and get it delivered instantly.

• Futures markets: Buying currency at the given exchange rate but getting it delivered in the future to avoid bad exchange rates.

what are the different functions that money must have?

• Medium of exchange

• Store value

• Measure of value

• standard of deferred payment

What are some characteristics of money that it has to be?

• Acceptable

• Portable

• Durable

• Divisible

• Limited in supply

• Difficult to forge

What is commodity money?

Any money that has intrinsic value (gold)

What is fiat money?

Non- intrinsic value money (notes + coins).

What are the different types of money?

• Notes and coins

• Deposits

• Near money

What is near money?

Non-cash assets that can be easily converted into money. For example bonds and deposits as you can get interest rates over the years.

What is the money supply?

Total amount of money circulating in the economy.

What is the money supply made up from?

• Narrow money

• Broad money

What is narrow money?

measure of money supply total amount of notes and coins but also all deposits individuals have in their bank accounts.

what is broad money?

Measure of money supply same as narrow money but with non-cash financial assets that can be easily converted into cash with a maturity (pay back date) of 5 or more years.

What is the quantity theory of money?

A theory that links growth rates in the money supply to growth rates in prices.

What is the fisher equation and what does each value mean?

MV = PQ

M: money supply

V: velocity of circulation

P: average price level

Q: quantity of goods and services sold

What is the formula for price level?

P = MV/Q

What two values are fixed in the fisher equation and why?

V and Q

Because they do not change enough (during recessions and booms) to have an effect on prices.

What can change of prices only be influenced by?

Changes in the money supply.