ECON 1009
INTERNATIONAL FINANCIAL INSTITUTIONS AND MARKETS
Tutorial One/Week Two
Short Tutorial Questions (one to two sentence answers)
1. What is the difference between a real asset and a financial asset?
A real asset is a physical asset that has worth due to its substance and properties such as a precious
metal, land, equipment, real estate or commodity. Whilst a financial asset is a liquid asset that gets its
value from contractual rights or ownership claim such as a stock, bond and mutual fund.
2. What does it mean to say that ‘every financial asset must also be a financial liability’?
Since a financial asset can be a stock, bond or mutual fund this asset can either increase or decrease
in value depending on the current state of the economy. This means that all financial assets can also be
a financial liability depending on how the current state of the market is performing.
3. (a) What is a security? (b) Distinguish between a capital market security and a money market
security. (c) What is the difference between the primary market and the secondary market for
a security?
Securities are known to be financial instruments and financial claims. An example of a security is shown
through stocks and bonds.
A capital market security is where long term assets such a stocks, bonds and property are bought that
carry more risk. Whilst a money market security is a short-term instrument which has a maturity of less
than one year, hence being a relatively low risk investment with a lower rate of return.
Treasury bill is a short term instrument
A primary market is where companies initially sell new security issues. Whilst a secondary market is
where the owners of securities can sell them to other investors. For example, a primary market security
would occur through an IPO whilst a secondary market security is shown through the stocks sold the
ASX such as Telstra.
For a company to go public they need an underwriter.
All IPO shares are pre allocated to investors
4. If your bank wishes to make a loan to you, where does your bank get the money from? Is it
from deposits the bank has previously accepted?
A bank is known as an authorised deposit taker and they can receive money from the reserve bank of
Australia to give loans to individuals.
Bank does not need to have the money to grant you a loan.
Banks can borrow from other banks like ANZ and Westpac
Do some research on monetary policy
5. If the Reserve Bank of Australia wishes to lend exchange settlement reserves to a private
bank, where does the RBA get the money from? Is it taxpayers’ money?
Rather than using taxpayers money to lend to other banks the RBA has the authority to create new
money as they are the currency issuer.
6. Money markets: What is the primary role of money markets? How do money markets work?
The primary role of the money markets is to act as a short term market where money is borrowed and
lent to bridge short term liquidity gaps. For example, to pay wages before revenue for sold goods are
received.
7. Capital markets: How do capital market instruments differ from money market instruments?
Capital market instruments are typically for the long term that carry higher risk investment. However, money
market instruments are for the short term and carry lower risk investments such as temporary financing.
Material for Group Discussion
As far as we can tell, money itself, alongside accounting, taxation and governmental institutions, was first
developed in what is now Iraq, more than 5,000 years.
It was initially defined in terms of weights of barley, which is where the term shekel originally came from,
and had its basis in the fact that people were forced to surrender to the governing power in taxes, tributes
and/or fees goods valued in shekels. Taxes did not have to be paid in barley, but they were valued in units
of barley.
Thousands of years later, and in the relatively recent past, there have been many examples of invading
armies imposing money on traditional tribal societies, where nothing resembling money had been used in
exchange for goods and services before.
To attract locals to work on building projects, or producing food to provision the invaders, or to work in
mines, or to join armies, the invaders imposed taxes, which could only be paid in the token (paper or coin)
money used by the invading country.
Those who did not pay their taxes were subject to imprisonment or slavery.
Consequently, they offered their labour, or their goods, to the invaders, to obtain that which was necessary
to pay taxes. Others did not work directly for the invaders but sold items in newly emerging markets to
those who had received money from those who were now in government.
This is how money and markets were introduced in a large number of previously traditional, communal, gift
societies. (Wray 1998; Graeber 2011)
1) Is money a scale of measurement or scoring system (like Celsius, or points in a basketball game);
or is money a thing (does it have a physical existence)?
Money is shown more as a scale of measurement rather than be a physical thing due to money being a
medium of exchange. It seems more accurate to associate assets such as property, real estate and
commodities as a thing that has physical existence.
2) How was money introduced into traditional societies (for example, into Southern Africa by the
British in the nineteenth century {no need to look it up, but one reference is Magubane 1979, p.
48})?
Money was introduced into traditional societies through imposing of taxes which could be paid through a
token such as money.
3) Where money is not guaranteed to be convertible at a fixed price into gold or any other real asset,
what is it that gives money value in exchange?
The reason for moneys value in exchange is demonstrated through people accepting this trade as a
medium of exchange for goods and services. Furthermore, moneys value is backed up by all governments
in the world shown through the ways money pays for taxes, debts and its stability within the economy.
4) What is the difference between a currency issuer and a currency user? Is a taxpayer a currency
issuer or a currency user? Is our Government, which owns the Reserve Bank of Australia, a
currency issuer or a currency user?
A currency issuer is a entity like a government or bank that has the authority to create and regulate a
currency. Whilst a currency user is known to be individuals and businesses that use the currency created
by the issuer to hold, spend or save the currency acting as a medium of trade.
A taxpayer is a currency user as they are individuals or businesses that cannot create or regulate currency,
instead they use of medium of trade to pay their taxes.
Our government is a currency issuer as they have the power to regulate and create currency.
5) True or false: “Taxes pay for government spending?” Explain your point of view.
It is argued that “Taxes pay for government spending”, however it is evident this statement carries a
multitude of interpretations and opinions. In today’s society, for a country to maintain stability and control
the collection of taxes is a necessity to fund public expenses ranging from healthcare, education and social
security. However, within Modern Monetary Theory it is argued that government can and should create
unlimited amounts of money to fund public spending programs for the benefit of society. Likewise, scholar
L. Randall Wray, emphasises this theory through his belief that taxes do not fund government programs
rather they serve to control inflation and redistribution of wealth. Overall, despite taxes being essential for
various economic issues, it evident that they do not contribute to government spending as effectively as we
once believed.
Sources
Graeber, D 2011 Debt: The First 5,000 Years, Melville House Publishing, New York. Magubane B
1979, The Political Economy of Race and Class in South Africa, Monthly
Review Press, New York.
Wray, L.R 1998, Understanding Modern Money, Edward Elgar, Cheltenham.