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Topic 5: The financial Sector - Coggle Diagram
Topic 5: The financial Sector
The Financial Sector
Role of the financial sector in the economy
Financial liquid assets exchanged in a financial market
faccilitates saving
lends to businesses and individuals
facilitates exchange of goods and services
Provides an informal financial market (forward market in currencies and commodities)
The role of saving and investment in promoting economic development
A stable financial market is essential to economic development . In developing countries, the limited wealth means money cant be put aside for the future and consumer spending is much higher. The low saving rates make orrowing more expensive and impede capital investment.
The Harrod Domar Model
Investmetn, saving and technological change are required in an economy for economic growth
Doesnt account for low propensity to save in some countries or poor financial systems
Microfinance and how it affects economic development
Borrowing small amounts of money to small businesses upon the investigation of the business plans, i.e 500 quid to buy an extra tractor
Increases income, consumption adn possiility of multiplier effect
Allows countries to break away from aid
95% of microfinance borrowers in Bangladesh are women
High repayment rates
Works best alongside education
Role of the financial sector in promoting economic development
Facilitates saving
Facilitates borrowing=> encourages investment
Enables management of the economy via fiscal and monetary policies
Gov ale to raise funds via bonds and bills
Money
Functions
Medium of exchanges
A measure of value
StorE of value
Method of deferred payment
Characteristics
Durability
Divisibility
Portability
Uniformity
Limited Supply
Acceptability
Money Supply
The stock of currency and liquid assets in an economy
Narrow money = physical currency, deposits and liquid assets
Broad money= ENTIRE MONEY SUPPLY liquid and less liquid
Interest Rates
How the interest rate is determined
Liquidity trap: when a change in money supply does not change interest rate
Inflation x nominal interest rates
high IR = high reward for saving+ high cost of borrowing = consumers spending less= effective for times of high inflation
low IR= low reward for saving and low cost of borrowing = more spending and investment= effective for times of low inflation or recession
The Fischer Equation: Money supply and price level
Qty theory of money => MV= PT
States that there is inflation if money supply increases at a faster rate than national income
T is hard to measure
Fischers Eqt => MV=PQ
M= supply of money, V= velocity of circulation, P = price level , Q= qty real goods sold (GDP), T= transactions
Value of expenditure is equal to total value of output
Assumes velocity is constant and Q is independent of money supply
Argues that increasing money supply causes inflation
Increased M = increased AD= inflationary positiv output gap
Foreign Currency Gap
When a country isnt attracting enough capital flow tio make up for a deficit in their capital account in their BoP. I.E current account deficit> capital inflows
Capital Flight
When capital and money leave the economy through investment in foreign economies. Triggered by an economic threat and worsens during economic currency. Can cause a currency depreciation
