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8 - The Market Mechanism, Market Failure and Government Intervention in Markets Summary Notes AQA AS/A-Level Economics: Paper 1 Microeconomics
1 - Economic Methodology and the Economic Problem Summary Notes AQA AS/A-Level Economics: Paper 1 Microeconomics
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Financial markets and monetary policy
The structure of financial markets and assets
Characteristics + functions of money
A medium of exchange
● Without money, transactions were through bartering + trading.
Exchanges were not always the same value. Money eliminates this
problem.
Measure of value (unit of account)
● Money measures the relative values of goods + services. Money also
puts a value on labour.
Store of value
● It doesn’t expire but the value fluctuates with the forces of supply and
demand.
Method of deferred payment
● Money can allow for debts to be created. This relies on money storing
its value.
Money supply
The stock of currency and liquid assets in an economy. It includes savings.
Narrow money
Physical currency (notes and coins), as well as deposits and liquid assets in
the central bank.
Broad money
Includes the entire money supply. Cash could be in restricted accounts,
which makes it hard to calculate the money supply. It includes liquid and less
liquid assets.
Money market
Liquid assets are traded. It is used to borrow + lend money in the short
term.
Capital market
Where equity and debt instruments are bought and sold. These can then be
put to long-term productive use by firms and governments.
Foreign exchange market
A market where currencies are traded, mainly by international banks. It
determines what the relative value of different currencies will be.
, The role of financial markets in the wider economy
● Financial liquid assets are exchanged in a financial market
● The stock market + bond market are two examples of financial markets
To facilitate saving
● Provide storage for funds. Savings are rewarded with interest
To lend to businesses and individuals
● The transfer of funds for investment or consumption
To facilitate the exchange of goods and services
● The transfer of real economic resources
● Providing a way that buyers and sellers can interact and transfer
To provide forward markets in currencies and commodities
● The currency market are used to trade. Speculative attacks can affect
the value of exchange rate
● In commodity markets, investors trade primary products. Future
contracts - buying an asset later on at a present agreed price
● A forward market is an informal financial market where these contracts
for future delivery are made
To provide a market for equities
● Equity markets involve the trade of shares aka stock market
● Access to capital + allow investors to own part of a market.
Debt
Money borrowed from a lender, which is usually a bank. There is little
flexibility, and the loan is later repaid with interest.
Equity
A stock or security which represents interest in owning e.g. a firm or a
house. It is when there is no outstanding debt. The owner’s equity can be
sold for cash.
There is an inverse relationship between market interest rates + bond
prices. When a bond is bought, money is lent to the issuer who agrees to
pay the value of the bond back when it matures + periodic fixed interest
payments.
New bonds have rates close to the market interest rate. If the market
interest rate falls, the bond would be worth more, since it carries a higher
interest rate than current market conditions. Similarly, the bond is worth less
if the rate increases.
Firms can raise finance by issuing shares, corporate bonds + borrowing.
Selling shares means paying dividends when there are distributable profits
and it is voted for by shareholders.
Borrowing might be unaffordable for new, smaller firms.
Corporate bonds are issued to raise funding for large projects e.g. a
takeover. Bonds are partially protected against variable interest rates or
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