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Summary AQA A-Level Economics: Financial Markets Detailed Notes
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Key Summary Notes for the AQA A-level Economics course on Financial Markets, guaranteed to boost you to the top grades.
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Financial MarketsFinancial Market = A place where buyers and sellers meet to trade financial
assets.
(E.g Bond market/ Stock Market)
Lenders = People who have excess cash who want to lend it and get return
on it.
i) Savers - People with lost of cash
ii) Investors - Also people with Excess cash
Lender can Either
1) Buy stocks directly from market
2) Go through an intermediary.
,Intermediary - loan money to borrowers - charge interest rate (HIGHER
THAN RATE OF RETURN) - so Intermediary ALWAYS makes profit.
Borrowers - People who need cash right now but don't currently have it
i) Individuals - People who want to buy something (car) but don't have
money to buy it.
ii) Firms - Firms who want to invest and grow business but don't have
retained profit right now
iii) Governments - Don't have the tax revenues to fund important policies
(Education/healthcare)
Types of Financial Markets:
Money Market: Buying and selling of financial assets that have a buyback
date of 1 year or less.
E.g Government Bonds, Interbank Lending
Capital Markets: Buying and selling of financial assets that have a
buyback date of over a year.
Debt capital : Any financial asset that pays back in interest rate - form of
borrowing.
(Bonds with maturity date of over year)
Equity Capital = A share of business - Return is a dividend.
(shares)
Two Types of Capital Markets:
Primary Market: new issue market - brand new bonds/shares issued
(through investment bank/ debt management system for bonds).
Secondary Market: Bonds and Shares can be bought and sold again.
(through investment bank/ debt management system for bonds)
Bonds/shares can be bought and sold - very liquid.
,Currency Markets:
Two Types:
Spot - Buy at currency at current exchange rates.
Futures - Buy currency at a given exchange rate but it gets delivered to you
some time in the future.
(speculator - predicting exchange rate will get stronger - buy at current
value - delivered over a time period - sell it and make profit)
Money and The Money Supply:
Functions of Money:
MONEY MUST SATISFY 4 FUNCTIONS
i) Medium Of exchange
Accepted as medium of exchange - other option is barter
ii) Store of Value
Cannot deteriorate over time - PHYSICALLY
(Inflation can erode store of value of money)
iii) Measure of Value
To find the values of different goods - to differentiate between goods.
iv) Standard of Deferred Payment
People who don't have money right now can borrow and pay back at a later
date. (Bringing Lender and Borrower together)
Characteristics of Money:
1) Acceptable
Accepted as a medium of exchange
2) Portable
Easily moved around
3) Durable
4) Divisible
Can be broken down into different units (pence, pounds)
5) Limited in Supply
So it keeps its worth
, 6) Difficult to Forge
Can't be easy to make so people dont make fake money.
Types of Money:
i) Commodity Money
Any money that has intrinsic value - gold
ii) Fiat Money
No intrinsic value - if money (notes and Coins) becomes worthless due to
hyperinflation they cannot be traded in for anything else.
iii) Notes and Coins
Money can vary in liquidity - highly Liquid
iv) Deposits
Individuals/ firms have in banks - Very liquid
v) Near Money
Non Cash Assets - Certificate of Deposit - can be converted into cash after
certain time period - Liquid (not as much as deposits/notes and coins)
LIQUIDITY = THE EASE AT WHICH MONEY CAN BE CONVERTED INTO
CASH.
The Money Supply: The total amount of money circulating in an economy
Narrow: M0 - Total amount of notes and coins + Deposits (Highly Liquid)
M1-M3 = Adding non cash forms of money - still liquid but not as liquid as
(Notes and Coins)
M4 - Broad - Still have notes and coins - But also (non- cash financial
assets with maturity dates of 5 years or less) which still are quite liquid.
Quantity Theory of Money
Quantity Theory of Money = Direct Link Between Money Supply and
Inflation.
(Monetarist Idea)
1) M (Money Supply) - E.g M4,M0
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