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Questions and Answers
What is the primary purpose of money markets?
Which factor does NOT affect the demand for credit?
What describes the money multiplier in a fractional reserve banking system?
How does inflation affect the supply of credit?
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What is the nominal interest rate?
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What limitation exists regarding banks' ability to create credit?
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Which market is primarily used for medium and long-term financing?
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What could be a consequence of poor lending practices by banks?
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What is the primary impact of increased mortgage interest repayments on homeowners?
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What effect do higher borrowing costs generally have on consumer behavior?
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Which of the following is a potential risk associated with rising interest rates?
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What is likely to happen to consumer savings when interest rates decrease?
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How does less competition in the banking sector primarily affect consumers?
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What is one key role of the Central Bank of Ireland?
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Which of the following describes a disadvantage of regulation in the banking sector?
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What happens to government revenue from DIRT when interest rates decrease?
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What is the impact of higher consumer spending on employment?
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Which argument against regulation is commonly raised by critics?
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What is one of the measures taken by the Central Bank to ensure stability in the financial sector?
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What is a significant effect of increased savings rates on the economy?
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What role do financial markets play in the economy?
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Study Notes
Types of Financial Markets
- Money Markets: Short-term finance for day-to-day operations of industries, companies, banks, and governments.
- Capital Markets: Medium and long-term finance for governments (bonds) and firms (shares). Facilitates long-term financing.
- Foreign Exchange Markets: Platform for buying and selling different currencies.
Money Supply
- Factors affecting the demand for credit:*
- Interest Rates: Higher rates discourage borrowing, while lower rates encourage it.
- Future Expectations / International Economic Climate: Optimistic economic outlook leads to increased borrowing for expansion.
- Government Intervention / Policy: Policies can influence borrowing through incentives or deterrents.
- Factors affecting the supply of credit:*
- Inflation/Deflation: Increased credit supply can lead to inflation if it outpaces demand.
- Balance of Payments: Higher credit availability can lead to increased imports due to higher consumer purchasing power.
- Poor Lending Practices: Banks might extend loans to risky borrowers in pursuit of profits.
How Banks Create Credit
- Fractional Reserve Banking System: Banks hold reserves less than the total value of their deposits, allowing them to create credit.
- Money Multiplier: Represents the amount of money a bank can create based on its reserves.
Limitations on the Power of a Bank to Create Credit
- Reserve Ratios: Legal requirement for banks to hold a percentage of deposits in reserves.
- Lack of Cash Deposits: Banks need depositors to attract borrowers and offer competitive interest rates.
- Availability of Suitable Borrowers: When suitable borrowers are limited, banks might lend to risky ones.
Interest Rates
- Nominal Interest Rate: Interest rate before adjusting for inflation.
- Real Interest Rate: Nominal interest rate minus inflation rate.
Effects of an Increase in Interest Rates on the Irish Economy
- Increased Mortgage Interest Repayments: Higher mortgage costs for homeowners with variable-rate mortgages.
- Slowing Economic Growth: Reduced consumer spending due to higher borrowing costs.
- Risk of Personal Bankruptcies Due to Loan Defaults: Struggling borrowers face default risk, leading to potential bankruptcies.
- Reduced Investment: Elevated borrowing costs discourage businesses from investing.
- Reduction in Consumption: Consumers save more and spend less due to increased returns on savings.
- Rising Unemployment: Decreased spending and investment lead to lower labor demand, potentially increasing unemployment.
Effects of a Decrease in Interest Rates on the Irish Economy
- Borrowing Encouraged: Lower borrowing costs stimulate consumer spending and improve living standards.
- Incentive to Invest: Reduced borrowing costs and better returns on capital encourage business investment.
- DIRT Revenue Decreased: Lower savings rates might decrease government revenue from Deposit Interest Retention Tax.
- Savings Discouraged: Lower returns on savings discourage saving, leading to increased consumer spending.
- Reduced Mortgage Repayments: Lower mortgage repayments boost disposable income and living standards.
- Cost of Servicing the National Debt: Lower interest rates reduce the cost of repaying internal national debt.
- Economic Growth Encouraged: Increased investment and consumer spending stimulate economic growth.
- Employment: Increased demand for labor due to higher spending and investment, potentially increasing employment.
Financial Markets
- Facilitate money movement across time and geography using interest rates to manage risk.
- Enable cross-border capital flow, expanding global financial opportunities.
Financial Institutions Operating in Ireland
- Stock Brokers
- Commercial Banks
- Credit Unions
- Insurance Firms
- Investment Funds
Role of Financial Institutions
- Provision of Credit Facilities
- Pool Risk
- Offer Investment Advice
Effects of Less Competition in the Banking Sector
- Decreased Standard of Living: Higher prices and restricted choice can lead to lower living standards.
- Less Rural Economic Activity: Limited access to financial services in rural areas due to reduced competition.
- Decrease in Consumer Banking: Fewer options for consumers can lead to job losses in the sector.
The Regulator and Regulation Within the Banking Sector
- Central Bank of Ireland: Regulates the banking sector to prevent unauthorized financial providers and protect depositors.
Role of the Regulator
- Ensures Stability of the Financial System
- Protects Customer Financial Services
Arguments for Regulation in the Banking Sector
- Consumers Are Charged a Fair Price
- High Quality
- Higher Equity Requirements
- Lower Risk for Financial Crises
- Lower Costs for Taxpayers
Arguments against Regulation in the Banking Sector
- More Difficult for Irish Businesses to Access Finance
- No Guarantee It Will Work
- High Levels of Administrative Work
- High Barriers to Entry for New Financial Companies
The Effectiveness of the Regulator
- Stability of the Financial Sector: The Central Bank has crisis management protocols to address destabilizing events.
- Protection of Consumer Financial Services: The Central Bank enforces accountability measures for lenders.
IMF and World Bank as Regulators
- Assess countries' financial markets and recommend crisis prevention policies.
Central Bank of Ireland
- Governor Gabriel Makhlouf is a member of the ECB's Governing Council.
- Plays a key role in the Irish economy.
Role of the Central Bank of Ireland
- Price Stability
- Regulation
- Protection of Consumers of Financial Services
- Banker to the Government of Ireland
- Efficient and Effective Payment Systems
- Independent Economic Advice and High-Quality Statistics
- Recovery and Resolution of Financial Institutions
Impact of an Increase in the Savings Rate on the Irish Economy
- Liquidity and Stability in the Banking Sector
- Decline in Aggregate Demand and Delayed Consumption
- Increase in DIRT Revenue for the Government
Outline One Economic Advantage of Non-Cash-Based Methods of Payment for the Following:
- Consumers: Increased convenience, digital record keeping, and reduced risk of theft.
- Banks: Reduced staff time dealing with cash, new banking methods development, lower staff costs, decreased robbery risk, and lower insurance premiums.
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Description
This quiz explores the different types of financial markets, including money markets, capital markets, and foreign exchange markets. Additionally, it delves into the factors that affect the demand and supply of credit, such as interest rates and government policies.
