Central Banks

Question 1

What are the roles of Central Banks?

Answer 1

Work independently to gov, act with publics best interest
1. provide services to commercial banks
2. Conduct monetary policies (interest rates)
3. Regulate the financial system (rules)

Question 2

How does the BoE influence the economy?

Answer 2

• Interest rates paid on banks reserves, so no bank runs
• Changes it’s balence sheet

Question 3

What does BoE balence sheet look like?

Answer 3

• Asses = loans to banks, gov bonds
• Liabilities = currency in circulation, reserves - as commercial banks can remove whenever

Question 4

What is Monetary Base?

Answer 4

Total amout of money held by banks as reserves
- allows banks to pay each other
- allows banks to meet withdraws

Question 5

How to work out Monetary Base?

Answer 5

MB = C(tot) + R

• C(tot) = Currency in circulation (public+banks)
• R = Reserves at BoE (sources like payments, open market operations)

Question 6

Why would BoE need open makret operations

Answer 6

Allows them to sell/ buy gov bonds, thus influencing the money supply

Question 7

Positive to having more reserves

Answer 7

Increases confidence, allows banks to make more loans

Question 8

Why are Open market purchases used alongside interest rate cuts

Answer 8

Increases broad money supply
- Prevents excess demand for reserves
- Gets other short term interest to decrease