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Chapter 2.8 - The Role of Money and Financial Markets (Insurance Companies…
Chapter 2.8 - The Role of Money and Financial Markets
Keywords
Money
- Anything that is generally accepted as a means of payment for goods and services
Medium of Exchange
- Anything that sets the standard of value of goods and servoces acceptable to all parties involved in a transaction
Investment
- Purchase of capital goods that are used to produce future gods and services. Also an assest purchased to provide an income in the future and/or to be sold at profit
Interest Rate
- Cost of borrowing money. Also the reward for saving
Mortgage
- An agreement with a financial institution to borrow money to purchase a property
Financial Sector
- Consists of financial organisation and their products and involves the flow of capital
Functions of Money
The unit of account
- Provides a common measure of the value of goods and services being exchanges. Helps traders to avoid the problem of deciding prices of all goods/services
Stores value
- Money generally does not lose it's value overtime and acts as a store of values, people can save it
Medium of exchange
- Easy to exchange for a service
Deferred Payment
- Allows people to buy goods and credit as well as allowing people to pay in the future in installments. It prevents confusion and cheating
Debit v Credit Cards
Debit Cards
If you do not have enough money in acount , you cannot buy the product
No charge to the seller for accepting these cards in payment
Take money directly from you current account and transfer it to the seller
Credit Cards
Enable you to buy goods whether or not you have the money in the account
A loan for up to 30 pounds
If you cannot pay it all back, you are charged interest on the amount outstanding
Central Bank
Control monetary policy by setting the bank rate (interest rate set by Bank of ENgland from which all other interest rates are calculated)
Provide financial stability by trying to ensure the UK's citizens can trust financial organisations
Issues bank notes
Manage countries foreign reserves and if necessary intervene in the foreign exchange market
Act as the bank for commercial banks
Be bank for government
Commercial Banks
Issue loans to individuals and firms
Provide overdraft facilities
Make payments on behalf of their customers either by accepting their cheques or through card payments, phone payments, bank transfers etc.
Offer safe deposit boxes for very expensive items like jewellery and important documents
Accept deposits and in many cases pay interest on the as well as keep savings safe
Provide foreign currencies for firms trading overseas and holidays
Building Societies
Provide savings, products and morgages for their members
Different from banks as banks are owned by shareholdes who have voting power depending on amount of share bought
These members have rights to attend and speak at meettings as well as vote on issues
Limited in amount of money they can borrow from the money market
Mutual financial instiutions meaning their members who save money with them own them
Insurance Companies
Life insurance aims to pay out money to the surviving family if the person injured dies.
Whole-of-life polcity pays out when person dies. Term life insurance policty covers person for specific period. These policies are intended to help replace loss of income due to the death of the person insured
Functions are usually divided into two groups: Life insurance and general insurance
Life insurance covers long-term savings, pensions and annuties
Financial institutions that guantee compensation for speicified loss, damage, illness or death in return for an agreed payment
General insurance covers all non-life policies including property, contents, motor, health and pets etc.
Helps individuals and firms deal with unexpected events
Importance of FInancial Sectors
Liquidity Provision
Allos them to continue to function when face with unexpected demands for cash
Banks do thinks for offering for example overdraft facilites
Banks are the main providers of liquidtiy to households and businesses
Refers to how easy it is to turn as asset into cash
Risk Management
If one does less well, savwers do not lose all their money and others may be doing much better
A professional finance manager takes peoples money and invests it in a range of companies
Financial institutions allow both invidivduals and businesses to pool their risks from exposure to financial markets
Credit Provision
GOvernments use credit to enable them to spend money when tax revenue has not been collected
Good for producers as they can borrow money to enable them to grow without saving for a long time
Provision of mortgages where consumers only have to find a small percentage of the cost of housing has given far more consumers the ability to buy their own home
Include valuable way for consumers to buy now and pay later increasing consumption
Without credit level of economic activity in the economy would be greatly limited
Interest Rates
How do they effect level of borrowing?
Higher interest rates increase the cost of borrowing meaning individuals and firms tend to borrow less
Not just because borrowing is more expensive, but more interest also needs to be paid back
Rise in interest rates ie likely to lead to increase in foreign exchange value of pound so exports are less competitive meaning firms sell less and once more reduce borrowing
People might get more motivated to save rather than spend
How do they effect level of investment?
Not always straightforward, of consumers lack confidence in the economy the firms might not increase investment as they do not expect more demand
Fall in interest rate means it is cheaper to boeeow and more people will spend money, therefore investment is increased
How do they effect level of saving?
On the other hand if interest rates fall then people will get discouraged to save a lot
Ineterest rates offered to savers will encourage people to increase level of savings