Summary
Summary - Unit 4 ECON4 - Economics: Financial Markets
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Detailed notes on financial markets.
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MACRO 12Financial markets
Money
Medium of exchange
Store of value
Unit of account
Standard for deferred payments
Acceptable by all
Portable
Limited supply and difficult to forge
Durable
Divisible
Cash – coins and notes
o No intrinsic value but is backed by law
Money in current accounts
o Electronic money that has been deposited in banks or building societies by
people
Near monies
o Assets which can be turned into money fairly quickly
o Saving accounts where additional notice needs to be given to withdraw
Financial assets
o Assets that aren’t easy to turn into cash
o Bonds
Liquidity is how quickly assets can be turned into cash
Cash is the most liquid of all assets
Houses are one of the most illiquid of all assets
Money supply
Narrow money is cash and current account
o M0
Broad money is narrow money + near monies
o M4
Different types of money so different measures of the money supply
Narrow money and broad money are the relevant measures which influence money
supply
Financial markets
, Normal market is where buyers and sellers come together to exchange goods and
services using money as a medium of exchange
Financial market is where buyers and sellers trade services and assets that are
monetary in nature
Provide genuine financial services to households, firms and government
o Credit, investments, insurance
Allow participants to speculate and make money
Two reasons can be in conflict
Money market
o Short term borrowing and lending
o Treasury bills/ commercial bills
o Inter bank lending where banks lend surplus cash reserves to each other
every day – LIBOR
Capital market
o Longer term loans – financing for individuals and businesses
o Bonds and shares
FOREX market
o Trading different currencies
o Mostly speculative rather than for international trade purposes
Financial services
Lending
o To consumers, businesses and government
Saving
o To consumers, businesses and government
Facilitating payments
o Between businesses and customers or businesses and other businesses
Forward markets
o Creating guaranteed prices for commodities and currencies in the future
Trading assets like equities
o Shares
Insurance
o Protecting against future financial liabilities
Financial assets and investments
o Treasury bills and commercial bills
o Bonds
o Shares
o Pensions
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