Central Bank Flashcards
Bonds
Raise funds to finance a range of projects from infrastructure to war.
After a predetermined period of time, the government would repay the loan, including interest.
Commercial Banks
Banks which have the power to create money through credit.
When individuals deposit money into a bank account, the bank is only required to keep a small percentage of the deposit as cash. The commercial bank lends out the rest for a profit.
Credit Creation
Commercial banks have the power to create money.
When people deposit money into the bank, the bank is only required to keep a small % of the deposit as cash = reserve requirement.
The rest they can lend out, and in doing so create credit.
Deposit
The amount of money individuals put into the bank for safekeeping, and/or to earn interest.
Inflation Targeting
Where the central bank uses monetary policy to maintain inflation close to an agreed target (usually around 2%).
Interest Rate
The cost of borrowing money
Return for savings
Lender of Last Resort
In a financial crisis, consumers may lose faith in their bank and the central bank may intervene to provide financial support to banks.
Liquidity
The ease with which a bank can sell financial assets such as bonds, stocks and others, to raise finance to be able to meet the needs of withdrawals from deposits.
Loanable Funds Market
Determines the real interest rate.
The demand for loanable funds is determined by individuals and firms who wish to borrow money.
The supply of loanable funds is based on the stock of savings.
Minimum Lending Rate
The rate at which the central bank charges commercial banks to borrow money.
Minimum lending base rate influences all interest rates set by commercial banks
Money Supply
The total amount of money in circulation
All the money individuals have available to spend at any given period of time.
Open Market Operations
When the central bank buys and sells bonds (or US Treasury Securities) on the open market to regulate the money supply.
Quantitative Easing
Where the central bank creates digital money.
The central bank then uses this newly created digital money to buy bonds, such as government bonds or even mortgage backed securities.
Quantitative tightening
Where the central bank destroys digitally created money by selling bonds and not adding the proceeds of the sale to its balance sheet.
The central bank attempts to roll back the expansion in the money supply after using quantitative easing.
Reserve Requirements
Banks receive deposits from individuals. They hold a proportion of that deposit in their vaults, and lend out the rest.
