Câu hỏi ôn thi money banking and financial market 2017

1. Definition of money. The differences between money and wealth and income. 3 2. Players of money demand of the economy. Role of each player in Vietnam economy. 3 2. Which type of money is the best store of value? When is cash used to store value? 4 3. Forms of money. 5 4. Definition of inflation. Classify inflation into 3 main types. Give examples of each type of inflation in Vietnam. 6 5. Causes and effects of inflation. 7 6. Performance of inflation. 7 7. Instruments of Financial Market? The development of these instruments in Vietnamese Financial Market? 8 8. Explain “adverse selection problem” ? 9 9. Explain “moral hazard problems”? 9 10. Explain “Asymmetric Information”? 9 11. Explain function of a bank loan officer? 10 12. How does money withdraw impact on reserves and checkable deposits of a bank? 11 13. A bank holds more money of excess reserves, which effects on checkable deposits in the banking system or not? What will happen with vice versa? 11 14. Changes in structure of banking Industry? 12 15. Evolution of International banking? 12 16. Expand Monetary Policy and Tight monetary policy? 13 17. Reserve Requirement of Monetary Policy. 13 18. Function of Central Bank. 13 19. Operation of Central Bank. 15 20. Definition and forms of Foreign Direct Investment (FDI). Relating to Vietnam? 15 21. Definition and forms of Foreign Indirect Investment (FII). Relating to Vietnam? 16 22. Definition and features of Foreign Exchange Market 16 23. Definition and features of Eurocurrency Market. 17

NGÂN HÀNG CÂU HỎI ÔN THI HỌC PHẦN: MONEY, BANKING AND FINANCIAL MARKET BỘ MƠN: TÀI CHÍNH CƠNG Để đáp ứng yêu cầu việc thi hết học phần, người học cần tập trung ôn tập vấn đề sau: I NHĨM CÂU HỎI 1 Definition of money The differences between money and wealth and income - Money as anything that is generally accepted in payment for goods or services or in repayment of debts:  Currency (paper money, coins)  Checks  Saving deposit  … - Wealth includes not only money but also other assets such as bonds, common stocks, art, land, furniture, cars and houses Income is a flow of earnings per unit of time Money, by contrast, is a stock It is a certain amount at a given point of time Ex: If someone tells you that he has an income of $1,000, you cannot tell whether he earned a lot or a little without knowing whether this $1,000 is earned per year, per month, or even per day But if someone tells you that she has $1,000 in her pocket, you know exactly how much this is Players of money demand of the economy Role of each player in Vietnam economy - Players of Money Demand  Institutions  Individuals  Banks  Government - Role of each player in Vietnam economy  Institutions: Institutions in Vietnam, including businesses, corporations, and non-profit organizations, are key drivers of economic activity They contribute to the demand for money by investing in infrastructure, technology, and human capital Institutions generate employment opportunities, pay wages and salaries, and contribute to the production of goods and services Their financial activities, such as borrowing, investing, and managing capital, impact the overall demand for money in the economy  Individuals: Individuals in Vietnam contribute to the demand for money through their consumption, saving, and investment behaviors Their spending patterns affect various sectors of the economy, such as retail, housing, and transportation Individuals' savings provide capital for investment and contribute to the overall money supply The demand for money by individuals is influenced by factors such as income levels, consumer confidence, interest rates, and inflation  Banks: Banks play a crucial role in the Vietnamese economy by facilitating financial transactions, providing credit, and promoting economic growth They serve as intermediaries between savers and borrowers, channeling funds to productive sectors Banks lend money to businesses and individuals, supporting investments, consumer spending, and entrepreneurship They also offer a range of financial services such as deposits, loans, and payment systems, contributing to the efficiency of the economy  Government: The government of Vietnam has an important role in shaping the country's economy It formulates and implements fiscal and monetary policies to promote economic stability, growth, and social development The government's demand for money is driven by public expenditures, including infrastructure projects, education, healthcare, and defense It raises funds through taxation, borrowing from domestic and international sources, and official development assistance The government also influences the demand for money through monetary policies set by the State Bank of Vietnam, which regulates interest rates, manages the money supply, and maintains price stability Players of money supply process Four Players in the Money Supply Process - Central Bank (the most important): the government agency that oversees the banking system and takes responsibility for conducting monetary policy - Banks (Commercial Banks): the financial intermediaries that accept deposits from individuals and institutions and make loans - Depositors: individuals and institutions that holds deposits in banks - Borrowers: individuals and institutions that borrow from depository institutions and institutions that issue bonds purchased by the depository institutions Which type of money is the best store of value? When is cash used to store value? - Historically, precious metals like gold and silver have been widely regarded as stores of value due to their scarcity and long-standing acceptance, their relative ease of transport, and the ease of exchanging them for different denominations These metals have intrinsic value and have been used as a medium of exchange and a store of wealth for centuries - Cash is discussed as a form of storing value in the following circumstances:  Precautionary motive: Cash is often held as a precautionary measure to meet unforeseen expenses or emergencies By keeping cash on hand, individuals and businesses can quickly access funds when needed, without relying on other forms of payment or credit  Speculative motive: Cash can be held as a store of value when there is uncertainty about future investment opportunities or market conditions If individuals or businesses anticipate a decline in the value of other assets, they may convert those assets into cash to preserve their wealth This speculative motive for holding cash allows for flexibility in responding to changing economic conditions  Transaction motive: Cash is used to store value temporarily for everyday transactions Individuals and businesses hold cash for immediate spending needs, such as buying goods and services or paying bills This ensures liquidity and convenience in day-to-day economic activities Forms of money - Commodity money:  Is money made up of precious metals or another valuable commodity: cow, sheep, stone necklace, …  Cons: This form of money is very heavy and is hard to transport from one place to another - Fiat money:  Is currency decreed by the government as legal tender  The value of fiat money is derived from the relationship between supply and demand rather than the value of the material that the money is made of It is based on faith  Cons: They are easily stolen and can be expensive to transport in large amounts because of their bulk - Checks: - -  A check is an instruction from you to your bank to transfer money from your account to someone else’s when she deposits the check  Checks allow transactions to take place without the need to carry around large amounts of currency  Cons: It takes time to get checks from one place to another; it often takes several business days before a bank will allow you to make use of the funds from a check you have deposited; the paper shuffling required to process checks is costly Electronic payment:  Transmit your payment electronically via internet  Cost savings when a bill is paid electronically from your bank account E-money: Exists only in electronic form: (3 forms)  Debit Card: A debit card is like a plastic version of your bank account Instead of using cash, you can use a debit card to pay for things When you make a purchase, the money is automatically taken out of your bank account It's a convenient way to shop without carrying cash  Stored-Value Card: A stored-value card is like a gift card or a prepaid card It already has a certain amount of money loaded onto it You can use this card to make purchases until the balance runs out Once the money is used up, you can add more funds to the card if needed It's like having a mini wallet with a specific amount of money on it  E-Cash (Electronic Cash): E-cash is like having digital money in your computer or mobile device It's a way to make payments online without using physical cash You can buy things or transfer money electronically using special digital tokens or certificates It's a digital version of cash that you can use for secure transactions over the internet Definition of inflation Classify inflation into main types Give examples of each type of inflation in Vietnam - Definition: Inflation is an increase in the overall level of prices It is characterized by a decline in the purchasing power of money, which means that the same amount of money can buy fewer goods and services - Types of inflation:  Creeping inflation: prices rise percent a year or less  Walking Inflation: inflation is between 3-10 percent a year  Galloping Inflation: inflation rises to 10 percent or more a year -  Hyperinflation: prices skyrocket more than 50 percent a month Examples in VN:  Creeping Inflation: In Vietnam, a period of creeping inflation occurred in the early 2010s For example, between 2011 and 2013, the average annual inflation rate ranged from around 9% to 11% This type of inflation allows for relatively stable economic conditions, and measures can be taken to control and manage it  Walking Inflation: in the late 1980s to early 1990s, following economic reforms During this period, inflation was somewhat elevated but remained below more severe levels For instance, in the early 1990s, annual inflation rates ranged from approximately 20% to 30%  Galloping Inflation: during the late 1980s and early 1990s In 1988, inflation soared to around 300%, and by 1994, it reached an alarming rate of approximately 40%  Hyperinflation: the period of the Vietnam War from the mid-1960s to the mid-1970s During that time, inflation reached astronomical levels due to war-related factors and economic instability, severely devaluing the currency Causes and effects of inflation - Causes of inflation:  Quantity theory: too much money in the economy causes inflation  Demand-pull theory: when demand for goods/services exceeds existing supplies  Cost push theory: when producers raise prices to meet increased costs, leads to wage price spiral - Effects of inflation: + Creeping inflation stimulates the economic development, it benefits economic growth This kind of inflation makes consumers expect that prices will keep going up, which boosts demand + High inflation has negative effects on the economy:  To business Impact: High inflation disrupts planning, squeezes profit margins, and distorts pricing strategies, making it challenging for businesses to operate effectively  To commodity Circulation Impact: High inflation reduces consumer purchasing power, leading to decreased demand, lower sales, and potential economic contraction  To money and Credit Impact: High inflation erodes the value of money, affects savings and investments, limits access to credit, and hinders investment  To state Budget Impact: High inflation strains the state budget, increases the cost of providing public goods and services, and may result in fiscal deficits and borrowing  To consumption and Living Standards Impact: High inflation reduces real income, diminishes purchasing power, and lowers the overall standard of living for individuals and households Performance of inflation - Creeping Inflation:  Moderate and stable price increases  Allows businesses and individuals to plan and adjust gradually  Can incentivize spending and investment  Central banks aim to manage creeping inflation within a target range for price stability and sustainable economic growth - Walking Inflation:  Higher rate of price increases compared to creeping inflation  Creates some challenges for businesses in planning and pricing strategies  May start to impact consumer purchasing power  Requires careful monitoring to prevent acceleration into galloping inflation - Galloping Inflation:  Extraordinarily high inflation rates, often above 20% to 50% annually  Severely disrupts the economy and exacerbates recessions  Rapid loss of money's value affects businesses, employees, and government credibility  Foreign investors tend to avoid countries facing galloping inflation, limiting capital inflow - Hyperinflation:  Extreme form of inflation with inflation rates reaching triple-digit percentages monthly  Rapid loss of purchasing power and economic instability  Destroys savings, undermines confidence, and leads to economic collapse  Requires immediate and drastic measures to restore stability, such as currency reforms Instruments of Financial Market? The development of these instruments in Vietnamese Financial Market? - Instruments of Money Market •Short-term Debt Securities –Issued by governments, financial institutions and corporations •Investors are paid interest for the use of their funds •Generally low-risk •Treasury bill •Bank certificates of deposit •Commercial paper • Banker’s acceptances • Repurchase agreements •… - Ex: Treasury bills issued via auctions at the SBV Operations Centre will be registered and deposited at the Vietnam Securities Depository (VSD) The bills will be listed and traded at the Hanoi Stock Exchange, and its clearance and settlement payment are implemented via the VSD 10 Explain “adverse selection problem” ? - Adverse selection is the problem created by asymmetric information before the transaction occurs Adverse selection occurs when the potential borrowers who are the most likely to produce an undesirable (adverse) outcome-the bad credit risks-are the ones who most actively seek out a loan and are thus most likely to be selected - Because adverse selection makes it more likely that loans might be made to bad credit risks, lenders may decide not to make any loans even though there are good credit risks in the market place 11 Explain “moral hazard problems”? - When borrower has incentive to use proceeds of loan for more risky venture after loan is funded - Bank manager must manage interest rate risk - Moral hazard is the problem created by asymmetric information after the transaction occurs - The borrower might engage in activities that are undesirable (immoral) from the lender’s point of view, because they make it less likely that the loan will be paid back => lenders may decide that they would rather not make a loan 12 Explain “Asymmetric Information”? - "Asymmetric information" is a term that refers to when one party in a transaction is in possession of more information than the other - In certain transactions, sellers can take advantage of buyers because asymmetric information exists whereby the seller has more knowledge of the good being sold than the buyer The reverse can also be true 13 Explain function of a bank loan officer? The function of a bank loan officer is to evaluate loan applications and make decisions that balance the needs of the borrower with the risk to the bank, in order to ensure that loans are profitable and sustainable for both parties The specific duties of a bank loan officer may include:  Marketing, prospecting for potential customers: This is considered as one of the important tasks to increase the sales of a credit officer You are responsible for finding new customers and zoning potential customers Credit staff will advise customers on loan products or use services such as savings deposits, payment deposits and other bank facilities  Client consultant: Based on the existing data about the customer, the credit officer will work directly with the customer, give the most appropriate advice, enthusiastically answer service questions, and help customers understand as thoroughly as possible  Reviewing loan applications: Loan officers must review loan applications carefully, looking at factors such as the applicant's credit score, income, and debtto-income ratio, as well as the purpose of the loan  Verifying information: Loan officers may need to verify the information provided by applicants, such as employment history, income, and assets  Analyzing risk: Loan officers need to assess the risk of lending to eachapplicant, considering factors such as credit history, collateral, and the purpose of the loan, prestige, business capacity, scale of operation, financial capacity, business situation, business plan (plan), ability torepay principal and interest, loan collateral  Making loan decisions: Based on their analysis, loan officers must make a decision on whether to approve or deny the loan, and what the terms and conditions of the loan should be  Providing customer service: Loan officers may also provide customer service to loan applicants, answering questions and providing guidance throughout the loan application process  Monitor the status of loan use: For loan cases, credit officersare responsible for checking the status of loan use inaccordance with the bank's regulations and monitoring therepayment of principal and interest of the customer according tothe contract between the bank and the borrower capital  Finalize the contract according to regulations 14 How does money withdrawing impact on reserves and checkable deposits of a bank? - Reserves: Reserves refer to the funds held by a bank to meet withdrawal demands and fulfill its regulatory requirements When a customer withdraws money, the bank needs to provide the cash from its reserves As a result, the amount of reserves held by the bank decreases - Checkable Deposits: Checkable deposits are the funds held in bank accounts that can be easily accessed through checks, debit cards, or electronic transfers When a customer withdraws money, the checkable deposit balance in their account decreases This reduction in checkable deposits is equal to the amount of money withdrawn 15 A bank holds more money of excess reserves, which effects on checkable deposits in the banking system or not? What will happen with vice versa? - When a bank holds more money in excess reserves, it does not directly impact checkable deposits in the banking system but they can influence the lending capacity of banks, which in turn can have an indirect impact on the growth of checkable deposits in the banking system (Excess reserves are the funds that banks hold beyond their required reserves These excess reserves act as a cushion or buffer for the bank, providing additional liquidity and security.) - The increase in excess reserves does not automatically translate into an increase in checkable deposits in the banking system Checkable deposits are the funds held in bank accounts that can be easily accessed through checks, debit cards, or electronic transfers - However, it's important to note that the availability of excess reserves can indirectly impact checkable deposits through the lending process When banks have excess reserves, they have more capacity to extend loans to borrowers By making loans, banks create new checkable deposits in the accounts of borrowers These newly created deposits increase the overall level of checkable deposits in the banking system - On the other hand, if a bank reduces its excess reserves, it does not directly impact checkable deposits either However, if multiple banks in the banking system reduce their excess reserves simultaneously, it can reduce the overall availability of funds for lending This reduction in lending capacity can indirectly affect the growth of checkable deposits in the banking system 16 Changes in structure of banking Industry? - Consolidation and Mergers: The banking industry has seen significant consolidation and mergers, resulting in the formation of larger banks to achieve economies of scale and expand market presence - Deregulation and Financial Liberalization: Many countries have implemented deregulation and financial liberalization measures, allowing banks to enter new markets and offer a wider range of financial services, leading to increased competition and innovation - Technological Advancements: Banks have embraced technology, such as online banking, mobile banking, and digital payment systems, transforming the way customers access financial services and interact with banks - Non-bank Financial Institutions: Non-bank financial institutions, including insurance companies, mutual funds, and investment banks, have gained prominence, providing alternative sources of funding and investment opportunities - Globalization and Cross-Border Activities: Banks have expanded globally, engaging in cross-border lending, foreign investments, and international trade finance, resulting in increased interconnectedness among financial institutions - Regulatory Reforms: Stricter regulations and oversight measures have been introduced to enhance stability and mitigate risks in the banking industry, aiming to prevent financial crises and protect consumers - Rise of Shadow Banking: Non-bank financial intermediaries operating outside traditional banking regulations, known as shadow banking, have grown, presenting new challenges and risks to the banking industry 10