Global banking system and central banks

Question 1

What happens when economy slows?

Answer 1

Decrease interest rates. Bringing rates down will result in higher spending and people investing in the economy.

Question 2

Central banks

Answer 2

• manage currency, money supply, and interest rates for country (overnight rate)
• The banks bank. Play a role in overseeing commercial banks by lending them money so that commercial banks can loan money to us.

Question 3

Central banks role in recession

Answer 3

Economy needs to be stimulated. The banks will increase the supply of money by providing loans to people so that they can buy stuff and put back into the economy. These loans will be at a lower rate.

Question 4

Central banks role in inflation

Answer 4

Economy is too hot, they will increase rates, decreasing the supply of money and supply of loans

Question 5

Currency

Answer 5

The money that is used in circulation (bank notes and coins)

Question 6

Interest

Answer 6

the payment by a borrower to a lender above the principal amount.
Can be simple or compound.

Question 7

Principal

Answer 7

The initial size of the loan

Question 8

Bond

Answer 8

• a contract between two parties
• Ex. governments and companies issue bonds when they need large sums of money.Investors buy the bonds with the funds going to the issuer.

Question 9

Commercial banks

Answer 9

• Provide services such as taking deposits, making loans, provide investment products, and they operate as a business for profit.
• the peoples bank
• 5 main banks- scotia, BMO, TD, RBC, CIBC

Question 10

3 divisions of commercial banking

Answer 10

1. retail banking or consumer banking
2. commercial or wholesale banking- services to large customers and corporations such as mortgage brokers, real estate, pension funds
3. investment banking- provide advice

Question 11

Monetary Policy

Answer 11

the central banks actions and communications used to manage the supply of money.

Note there can be lags in monetary policy. Don’t want to print to much money as this could lead to recession.

Question 12

Quantitative Easing

Answer 12

How the central banks manage the supply of money. The central bank purchases long term bonds from the countrys largest banks, which give these banks more money to lend to people to spend in the economy.

Question 13

Fiscal Policy

Answer 13

Use of government revenue and expenses to influence a country’s economy.
Ex. taxes, Trudeau spending during COVID

Controlled by the government (ministry of finance).

Question 14

Overnight rates

Answer 14

The interest rate set by the central bank. The rate that the banks borrow and lend one-day funds to each other.
- Banks can also deposit and borrow from central bank for one day
- used to conduct monetary policy

Question 15

Overnight rate and prime rate

Answer 15

Overnight rate determines the prime rate.
Only most credit worthy clients will be able to get the prime rate

Question 16

COVID pandemic

Answer 16

Led to a recession but it was short lived due to quantitative easing. The market was stimulated by governments using fiscal stimulus. Bank rate and prime rates were decreased, but they overshot it, leading to inflation and increase in rates. This has caused the threat of an even longer recession