8. The Monetary System and Inflation Flashcards
Money
the set of assets in an economy that people regularly use to buy goods and services from other people.
functions of money
medium of exchange; anything accepted as a payment
medium of exchange benefits
escape complications of barter;
benefits of specialisation (people can specialise)
requirements of medium of exchange
acceptable to all, limited supply, readily portable, divisible, durable, stable in value
unit of account
yardstick to measure the relative value of goods and services.
store of value
transfer purchasing power from present to the future
deferred payment
buy now pay later - can acquire things you cannot afford immediately (pay weekly)
commodity money
commodity with intrinsic value (gold, food, clothing, EVEN TOILET PAPER etc.)
fiat/token money
no intrinsic value, only accepted because reserve bank/government promises money
Reserve bank/central bank functions
regulate/supervise activity of banks, make sure they act responsibly
regulate quantity of money
implements monetary policy objectives by the Policy Target Agreement (keep inflation within 1-3%)
issue notes and coins
OCR (Official cash rate)
interest rate set by the Governor of the RBNZ every six weeks
Settlement cash balance
balance that is the deposit that (commercial) banks keep with the RBNZ as cash reserves (to settle their end of day net transaction)
Fractional-reserve banking
holds a fraction of deposits as reserves and lend out the rest
Settlement accounts
accounts held by registered/commercial banks and other financial systems to settle the debt between them (ie cheques transactions between ANZ and BNZ, sent to Reserve bank to exchange settlement)
who can go into overdraft?
private people, not BANKS
liquidity ratio
ratio of settlement cash to bank’s assets that can be used as collateral
reserve ratio
fraction of deposits held as reserves
primary expansion of money supply
deposit of money
secondary expansion of money supply
credit creation (loans)
Policy Target Agreement
inflation must be less than 1-3%
money multiplier
how much money the banking system generates with each dollar of reserves, MM = 1/RR
Tools of the central bank
changing the OCR; changing reserve requirement (none in NZ), open-market operations
open-market operations
RBNZ buy government bonds from public, increasing the supply of money
RBNZ sells government bonds to public, the money supply decreases
how does selling government bonds to the public reduce the money supply
check is written to the reserve bank from your bank, decreasing the reserves of your bank so that it can’t loan as much
how does increasing the OCR affect supply of money
increasing OCR reduces money supply (if banks overlend then they have to pay a lot to the reserve bank for borrowing)
target reserve ratio or interest?
target interest, reserve ratio isn’t necessary (banks have to keep reserves for interbank transactions)
if the OCR is 2.75%, what will the interest rate be on loans from the NZRB and deposits with the NZRB?
3% interest rate to borrow, 2.5% interest on deposits (+-0.25%) NO LIMIT ON BORROWING
Given the OCR basis point addition subtraction, how would banks like to loan their money?
loaning to other banks, as any interest rate between +-0.25 of the OCR will benefit both banks.
