Financial Markets and Monetary Policy

What Financial Markets and Monetary Policy covers

Financial markets and monetary policy is examined on Papers 2 and 3. It covers money and the markets that move it, what banks do and the risks they run, then the Bank of England's policy and how a change in bank rate reaches the real economy.

The 15 subtopics

Each one has its own page.

• The characteristics and functions of moneyDurability, portability, divisibility and acceptability, and the four functions money performs.Open →
• Financial markets and their roleThe money, capital and foreign exchange markets, and how markets channel funds and price risk.Open →
• Debt, equity and bond yieldsHow debt differs from equity, calculating a bond yield, and why yields and bond prices move opposite ways.Open →
• Commercial banks, investment banks and the balance sheetWhat each type of bank does, and which items are assets and which liabilities.Open →
• Liquidity, profitability, security and credit creationThe conflict between a bank's three objectives, and how the banking system creates credit.Open →
• The instruments and institutions of monetary policyInterest rates, the money supply, credit and the exchange rate as the instruments of policy.Open →
• How bank rate changes affect the economyWhat a rise or fall in bank rate does to borrowing, saving, consumption, investment and aggregate demand.Open →
• What the MPC considers, and the exchange rate channelThe data behind an interest rate decision, and how the exchange rate carries policy into the economy.Open →
• The functions of a central bankBanker to the government, lender of last resort, issuer of notes and setter of monetary policy.Open →
• The bank rate and the MPC's decisionsThe inflation target, who sets bank rate, and the conditions for raising or lowering it.Open →
• Exchange rate movements and the macroeconomyWhat depreciation and appreciation do to net exports, inflation, the current account and employment.Open →
• The monetary policy transmission mechanismThe interest rate, exchange rate, asset price and expectations channels.Open →
• Quantitative easing and unconventional policyOpen market operations, reserve requirements, QE and forward guidance.Open →
• The regulators and the risks banks faceThe Bank of England, PRA, FPC and FCA, and the liquidity and credit risk that come with maturity transformation.Open →
• Liquidity ratios, capital ratios and systemic riskHow the ratios protect stability and what they cost, moral hazard, and how a crisis spreads.Open →

What you need to know

Answer each one before you reveal it.

Take Financial Markets and Monetary Policy further

The same content, four other ways.

Commonly confused

Pairs that lose marks when they are blurred together.

• Money market vs Capital market

  Money market: trading in short-term funds and liquid assets. Capital market: trading in longer-term finance and securities.

• Commercial bank vs Central bank

  Commercial bank: institution accepting deposits and providing private credit. Central bank: public institution managing monetary conditions and financial stability.

• Liquidity vs Solvency

  Liquidity: ease of converting an asset into spendable funds. Solvency: ability to meet total financial obligations.

Questions from this topic

Each one with the model answer underneath.

1. 1

   What does it mean for money to be durable?

   Model answer

   Durability means money must be able to withstand repeated use and last over time without deteriorating, so it can be used in multiple transactions.

2. 2

   Why is portability an essential characteristic of money?

   Model answer

   Portability means money must be easy to carry and transfer from one person to another, enabling convenient transactions.

3. 3

   What does divisibility mean as a characteristic of money?

   Model answer

   Divisibility means money can be broken down into smaller units to allow transactions of varying values and to give change.

4. 4

   Why must money possess acceptability?

   Model answer

   Acceptability means money must be widely recognised and accepted by people as a means of payment for goods and services.

5. 5

   Explain how money functions as a medium of exchange.

   Model answer

   As a medium of exchange, money is accepted in return for goods and services, eliminating the need for a double coincidence of wants required in barter.

6. 6

   What does it mean for money to act as a store of value?

   Model answer

   As a store of value, money can be saved and retrieved in the future, retaining its purchasing power over time.

What is inside Levo

Six ways to work the same material.

Financial Markets and Monetary Policy revision questions

What does Financial Markets and Monetary Policy cover in AQA A-Level Economics?

15 subtopics: the characteristics and functions of money, financial markets and their role, debt, equity and bond yields, commercial banks, investment banks and the balance sheet, liquidity, profitability, security and credit creation, the instruments and institutions of monetary policy, how bank rate changes affect the economy, what the mpc considers, and the exchange rate channel, the functions of a central bank, the bank rate and the mpc's decisions, exchange rate movements and the macroeconomy, the monetary policy transmission mechanism, quantitative easing and unconventional policy, the regulators and the risks banks face and liquidity ratios, capital ratios and systemic risk. Each one has its own page with questions and model answers.

How is Financial Markets and Monetary Policy organised?

By the AQA 7136 specification, subtopic by subtopic, so it matches the order you are taught it in.