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ECON112 > 2. Money & Banking > Flashcards

2. Money & Banking Flashcards

1
Q

Yield Curve

A

Curve showing several interest rates across different contract maturity lengths

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2
Q

Positive Yield Curve

A

Investors expect strong future economic growth and higher future inflation, increasing inflationary expectations thus, higher interest rates

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3
Q

Inverted Yield Curve

A

Investors expect sluggish economic growth and lower inflation, falling inflationary expectation thus, lower interest rates

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4
Q

Flat Yield Curve

A

Investors are unsure about economic growth and inflation

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5
Q

Money

A

Any good that is widely used and accepted in transactions involving the transfer of goods and services from one person to another

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6
Q

4 Functions of Money

A
  1. Medium of Exchange
  2. Measure of value, unit of account or mean of valuation
  3. Store of value
  4. Standard of deferred payment
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7
Q

Measures of Money Supply - M1

A

Includes cash and checking deposits

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8
Q

Measures of Money Supply - M2

A

All elements of M1 as well as “near money”

e.g. savings deposits, money market securities, mutual funds and other deposits

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9
Q

Measures of Money - M3

A

Measure of money supply that includes M2 as well as large time deposits, institutional money market funds, short-term repurchase agreements and larger liquid assets

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10
Q

Keynesian Theory of Liquidity Preference

A

The interest rate adjusts to balance the supply and demand for money

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11
Q

Keynesian Liquidity Preference Model - what does the equilibrium of MS and MD determine?

A

Nominal Interest Rate

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12
Q

Keynesian Liquidity Preference Model - why is MD downward sloping?

A

Because nominal interest rate is the opportunity cost of holding money

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13
Q

Keynesian Liquidity Preference Model - why is MS vertical?

A

Independent of the interest rate

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14
Q

Factors that affect demand for money

A

Income, interest rates, inflation, uncertainty

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15
Q

3 motives for demanding money

A
  1. Transactions Motive
  2. Precautionary Motive
  3. Speculative Motive
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16
Q

Transactions Motive

A

Demand for money arises from the fact most transactions involve an exchange of money - hence as income or GDP rises, transactions demand for money also rises.

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17
Q

Precautionary Motive

A

People often demand money as a precaution against an uncertain future - unexpected expenses

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18
Q

Speculative Motive

A

Arises in situations where holding money is perceived to be less risky than the alternative of lending the money or investing it into some other asset

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19
Q

What is money demand dependent on?

A

Both price level and real GDP, which together comprise the nominal GDP

20
Q

3 mechanisms for influencing money supply

A
  1. Open Market Operations
  2. Reserve Ratio Requirements
  3. Discount Rates
21
Q

Open Market Operations (OMO)

A

Buying and selling of securities to increase/decrease funds in the market

22
Q

Reserve Requirement Ratio

A

The portion of deposits that banks must have on hand as cash set by the central bank.
Increasing/decreasing the required reserve ratio, increases/decreases the amount of cash banks are required to hold in reserves, increasing/decreasing availability of loans. This increases/decreases money supply.

23
Q

Discount Rate

A

Interest rate charged to commercial banks and other depository institutions for loans received from a central bank, primarily to meet reserve requirements when cash on hand is low before the close of business

24
Q

Expansionary Monetary Policy

A

when the central bank uses any of its instruments of monetary policy in a way that causes an increase in the supply of money
Incr. MS Decr. Interest Rate

25
Q

Contractionary Monetary Policy

A

when the central bank uses its instruments to cause a reduction in the supply of money
Decr. MS Incr. Interest Rates

26
Q

As money moves from M1 to M3 it becomes

A

Less liquid

27
Q

Fractional Reserve Banking

A

A system where banks hold a fraction of their deposits as reserves and lend out the rest

28
Q

Liabilities

A

A banks deposits

29
Q

Assets

A

A banks reserves plus loans issues

30
Q

Fractional Reserve Banking and Money Supply

A

Changes in loans can increase/decrease money supply

31
Q

5 Objectives of RBNZ

A
  1. Monetary Policy
  2. Issue NZ notes and coins
  3. Register and monitor banks
  4. Provide banking services to banks
  5. Hold and manage foreign exchange reserves
32
Q

Taylor Rule

A

Monetary Policy Rule, says that the Central Bank raises interest rates whenever expected inflation is higher than target inflation

33
Q

Savings

A

Economy wide disposable income minus consumption purchases

34
Q

Financial System

A

Institutions in an economy that helps match one person’s savings with another person’s investment

35
Q

Investment is financed from…

A

(at least in part) domestic savings

36
Q

In a closed economy, economy wide investment equals…

A

Economy wide savings

37
Q

Open economy investment can be…

A

To a greater or lesser part funded by savings from overseas

38
Q

Two classifications of Financial Institutions

A
  1. Financial Markets

2. Financial Intermediaries

39
Q

Financial Markets

A

Institutions through which savers can directly provide funds to borrowers
- share market (equity), bond market (debt)

40
Q

Financial Intermediaries

A

Financial institutions through which savers can indirectly provide funds to savers
- Banks, managed funds

41
Q

Bond

A

Certificate of indebtedness that specifies obligations of the borrower to the holder of the bond (IOU)

42
Q

Share

A

Represents a claim to partial ownership in a firm

43
Q

The Market for Loanable Funds

A

Model that assumes the economy has a single financial market, with the good traded in the market being loanable funds
- Supply comes from savers
- Demand comes from investors
Price in the market is real interest rate

44
Q

3 Fiscal Policies that affect the market for loanable funds

A
  1. Taxes and savings
  2. Taxes and investment
  3. Government budget deficits
45
Q

Effect of reducing the tax on savings income

A

Increase the supply of loanable funds, interest rate will fall and the quantity of loanable funds will increase

46
Q

Effect of Investment Tax Credit

A

Increase demand for loanable funds,

both interest rate and quantity of loans will increase

ECON112 (3 decks)

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