2.4 Financial markets and monetary policy

Question 1

money supply

Answer 1

value of the stock of money

Question 2

narrow money

Answer 2

notes/coins and other liquid balances

Question 3

broad money

Answer 3

narrow money + non liquid balances

Question 4

money market

Answer 4

short term finance provided for individuals, firms and governments

Question 5

capital market

Answer 5

medium-long term finance provided through bonds and equity

Question 6

foreign exchange market

Answer 6

transactions in foreign currencies for immediate and future use

Question 7

treasury bills

Answer 7

short term debt borrowed by governments

Question 8

equity

Answer 8

shares in companies which pay dividends do shareholders

Question 9

bonds

Answer 9

debt issued by firms and governments that pays a fixed rate of interest and matures at a set date

Question 10

commercial bank

Answer 10

bank that accepts deposits for the public and lends to those wishing to borrow

Question 11

central bank

Answer 11

bank responsible for a currency and managing monetary policy

Question 12

monetary policy

Answer 12

managing the price of money and money supply

Question 13

bank rate

Answer 13

interest rate set by the government which influences all other interest rates in an economy

Question 14

transition mechanism

Answer 14

process of how a change in policy affects macroeconomic indicators and variables

Question 15

quantitive easing

Answer 15

increasing liquid funds available for banks so they are more willing to lend to businesses

Question 16

forward guidance

Answer 16

announcing the conditions for when policy is likely to change in the future

Question 17

moral hazard

Answer 17

when an institution takes too much risk due to not bearing costs of risky behaviour

Question 18

liquidity ratios

Answer 18

limiting how much a bank can lend to a % of its deposits

Question 19

capital ratios

Answer 19

limiting how much a bank can lend to a % of its capital issued

Question 20

systemic risk

Answer 20

risks that will affect the whole banking system