2.8 - The Role of Money and Financial Markets

define money

anything generally accepted as a means of payment for goods and services

current accounts (3)

• most common bank account most people use for daily, personal finances

• allos people to have a secure place to receive salaries and pay bills from

• typically comes with a debit card, which is helpful when paying for items and withdrawing cash

savings accounts (3)

• provides a safe place for people to deposit money in so it grows in value as interest is paid as a reward for saving

• important for account providers (banks) because they use the money from savings accounts to lend to people or firms, eg loans

• some money is held back to let people make withdrawals as they need the cash

features of debit cards (3)

• transfers money directly from buyer’s account to seller’s account

• can’t buy product if insufficient money in account

• no charge to seller for accepting debit cards

features of credit cards (3)

• can buy products if you don’t have sufficient money in account

• charged interest on amount outstanding if you can’t pay it all back

• sellers charged for accepting credit cards

define bartering

the need to find someone who has products you want and is willing to exchange for your goods and services

define medium of exchange

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

define financial sector

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

features of financial sector (3)

• helps markets to function, eg retail businesses sell high % of goods on debit / credit cards provided by banks

• allows economic agents to carry out economic activities - lending and borrowing money through banks and other financial institutions

• allows efficient organisation of economy - allows money to be moved from those who don’t need it immediately, eg savers, to those who use it now, eg borrowers

define investment

the purchase of capital goods used to produce future goods and services. can also include an asset purchased to provide an income in the future and/or to be sold for profit.

role of central bank (6) and who is the central bank in the UK

Bank of England is the central bank

• issues banknotes - supervises supply of money in economy

• controls monetary policy - sets the bank rate for interest

• provides financial stability - ensures UK citizens can trust financial organisations

• manages countries’ foreign reserves, and if necessary, intervene in the foreign exchange market

• acts as bank for commercial banks

• the bank for the government

role of commercial banks (5)

eg HSBC, Natwest

• accept deposits / savings from customers - pay interest on them, or keep them safe

• make payments on behalf of customers either by accepting cheques on behalf of customers or through card payments, mobile phone payments, bank transfers, etc.

• issue loans to people / firms and charge interest

• provide overdraft facilities - bank allows a current account holder to use money even when it is not in their account, and interest is charged on it

• offer deposit boxes for very expensive items, eg jewellery, and provide foreign currencies

what are building societies

mutual financial institutions owned by its members, i.e. people who save money with them. its primary objectives are to receive deposits from members and to lend money to members to purchase property.

members’ rights in building societies (2)

• attend and speak at meetings

• vote on issues - one vote each regardless of how much money invested

what do building societies provide? (2)

• savings products

• mortgages - financial agreements to borrow money in order to purchase a property

what are insurance companies?

financial institutions guaranteeing compensation for specified loss, damage, illness or death in return for an agreed payment, called premiums.

define general insurance

covers all non-life policies and includes property, contents, health, motor, pets, etc.

define life insurance

aims to pay out money to the surviving family if the person insured dies, designed to help replace the loss of income due to the death of the person insured.

life-insurance policies (2)

• whole-of-life - pays out whenever the person dies so long as the premiums have been paid

• term life insurance - covers the person for a specified time only

importance of financial sector (3)

• credit provision

• liquidity / cash provision

• risk management

credit provision for consumers (3)

• buy now and pay later with credit cards increases consumption, good for the economy

• buy their own homes with mortgages

• but, credit cards have encouraged some people to live beyond their means and run up large debts

credit provision for producers (1)

borrow money for growth and expansion

credit provision for governments (1)

use credit to spend money even when tax revenue has not yet been collected or when they need to spend more than tax revenue received

liquidity / cash provision (3)

• financial sector lends money to firms and households - particularly important if they have a cash shortage

• enables firms and households to gain access to cash, remain liquid and pay bills

• eg, banks offer overdraft facilities to firms so they can continue to pay wages, suppliers, etc.

risk management (1)

allows both individuals and firms to ‘pool’ their risks from exposure to financial markets.

define interest rates

the cost of borrowing money which is paid to the lender and the reward for saving.

what is an interest rate to a borrower, the bank and a saver?

• borrower - the cost of borrowing

• bank - return for lending

• saver - reward for saving

define savings

amount of money households / firms deposit in banks

relationship between interest rates and savings

the higher the interest rates, the higher the savings

define borrowing

households / firms are provided with money from the bank that must be repaid with interest

relationship between interest rates and borrowing

the higher the interest rates, the lower the borrowing

relationship between interest rates and investment

the higher the interest rates, the lower the investment