Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

Economics > Banking Sector > Flashcards

Banking Sector Flashcards

1
Q

Functions of Money

A
  • Medium of Exchange
  • Store of Value
  • Unit of account
  • Method of deferred payment
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

Roles of financial institutions

A
  • Maturity transformation
  • Risk transformation
  • Expert advise
  • Transmission of funds
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

Liquidity ratio

A
  • Fraction of bank deposits which have to be held in reserve
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Bank Multiplier

A

=1/Liquidity ratio (r)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

Money types

A
  • Monetary base
    -Narrow: coins and notes in
    circulation
    -Wide: + reserves in central
    bank
  • Broad money: + Retail bases, building societies, wholesale banks, certificates of deposits, sight and time deposits
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

Types of money demand

A
  • Active (L1)
    -Transitionary
    -Precautionary
  • Idle (L2)
  • Speculative
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Determinants of L1 money

A
  • Income
  • Interest rates: Opportunity cost
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

Determinants of L2 money

A
  • Interest rates
  • Expectations
  • Exchange rate
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Money equation

A

MS=L1(Y)+L2(r)
M̄+mr=L1Y+L2r+L̄
mr-L2r=L1Y+L̄-M̄
r(m-L2)=L1Y+L̄-M̄
r=L1Y+L̄-M̄/(m-L2)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Interest rate transmission mechanism

A

Increase money supply
Decrease interest rates
Decrease savings
Increase investment
Increase income

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

Elasticity stages of the interest rate transmission mechanism

A
  • MS->r : Elasticity of liquidity preference
  • r->I: Elasticity of investment
  • I->Y: Elasticity of withdrawals
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

Problems of interest rate transmission mechanism

A
  • Liquidity trap: Additional money is absorbed into idle balance at very low interest rates as the expectation is that interest rates will increase
  • Unstable demand for money: The liquidity preference curve is also effected by expectations and other factors
  • Unstable investment: Investment is effected by factors other than the interest rate
  • Interest rate on money flow: Interest rates also alter the change of money via debt repayments
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

Exchange rate transmission mechanism

A

Increase money supply
Decrease interest rates
Decrease exchange rate
Increase exports
Decrease imports
Increase income
Decrease withdrawals

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Classical Analysis of price and inflation
Equation of exchange

A

MV=PY=GDP

  • Money supply
  • Velocity of circulation
  • Price level
  • Income
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Velocity of circulation

A

The average number of times annually that money is spent on goods and services that make up GDP

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

Neutrality of Money

A

The principle that changes in the money supply only affects nominal variables and does not effect real variables

17
Q

Types of deposits

A

Sight deposits
Time deposits
Certificates of deposits
Repurchase agreement Repos

18
Q

Central bank roles

A

Issuing of currency
Lender of last resort
Banker to the government
Control monetary policy
Provide liquidity to banks
Regulate financial sector
Operates exchange rate policy

19
Q

Types of banks

A

Retail bank - operates services to individuals and small businesses
Wholesale banks - large scale deposits and loans with large companies

20
Q

Functional separation

A

Separation of investment and retail banks

21
Q

Financial deregulation

A

The removal or reduction of legal rules over financial practices

22
Q

Monetary financial institutions

A

Deposit taking institutions

23
Q

Maturity gap

A

Difference in the average maturity of loans and deposits

24
Q

Liquidity ratio

A

The proportion of a bank’s total assets held in liquid form

25
Q

Secondary market

A

When assets are sold before maturity to another party

26
Q

Securitisation

A

Where future cash flows are turned into marketable securities

27
Q

Special purpose vehicle

A

Legal entity created by financial institutions for conducting specific financial functions

28
Q

Liquidity

A

The ease with which assets can be converted into deposits

29
Q

Reasons for the endogenous nature of money supply

A

-Banks accommodating an increase in the demand for credit. Higher credit demand will lead to higher supply if banks have surplus liquidity or are willing to operate with lower liquidity or can increase liquidity through secondary markets
-Depositors switch to less liquid deposits. Higher interest rates encourages individuals to switch from sight to time deposits. This increases the certainty of the banks as they have a higher maturity. This may allow them to decrease their liquidity and increase credit and thus money supply
-Inflow of funds from abroad. Higher interest rates will increase the reward for saving in a UK bank leading to an increase in UK money supply to the extent that the Bank of England allows the exchange rate to appreciate

30
Q

Variability of the velocity of circulation across time periods

A

V is more unpredictable in the short run due to uncertainty and changing expectation leading to individuals to hold on to more money - precautionary money
In the long run, according to monetarists, the velocity of circulation is relatively stable. The reason for this is that sufficient time has elapsed for the direct mechanism to have worked fully through.
This is also explained by the effect on inflation and interest rates. An increase in the money supply will decrease the interest rates. But if money supply continues to increase, expenditure will increase and thus so will expenditure leading to inflation. This will drive up nominal interest rates even though real interest rates are low. Since nominal interest rates is the opportunity cost of holding money people economise on money balance and the velocity of money falls.

31
Q

Monetary effects of changes in the goods market

A

An increase in expectations will lead to an increase in investment. This will cause an increase in the transactionary demand for money. If the central bank does not wish for the economy’s money supply to rise, they will increase interest rates. This will cause a fall in injections and an increase in savings

32
Q

Financial crowding out

A

Where an increase in government borrowing diverts money away from the private sector.
When the government borrows money they issue new bonds. If these bonds are brought by banks then the banks will have less cash to give out to businesses as credit

33
Q

Factors affecting level of financial crowding out

A

Elasticity of money demand - If demand is elastic the increase in demand will lead to only a small increase in interest rates
The elasticity of investment to a change in interest rates

34
Q

If Central bank finances government expansionary fiscal policy at a balanced budget without tax increase

A

Central bank buys government bonds
Government gets money
Increase in the Money supply
MS curve shifts right
Interest rates decrease
LM curve shift right
AD curve shifts creates
Price level increases

35
Q

If Central bank does not finance government expansionary fiscal policy at a balanced budget without tax increase

A

Government sells bonds to private sector banks
Increase demand for money
L curve shifts upwards
Interest rates increase
Decrease LM curve

36
Q

Financial accelerator

A

The amplification of effects on the macroeconomy from economic shocks because of changes in pricing and supply of credit by financial institutions

37
Q

Financial instability hypothesis

A

The theory that the economy goes through stages of credit accumulation which initially fuel aggregate demand but because of increasing financial distress eventually sees a collapse in AD

Economics (21 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2025 Bold Learning Solutions. Terms and Conditions