Lecture 1

Question 1

The Quantity Theory of Money

Answer 1

M x V = P x T Amount of cash used in all the transactions in an economy over a period is equal to the monetary value of all the goods and services that the money is used to purchase

Question 2

Money Neutrality

Answer 2

An economic theory that states that changes in the aggregate money supply only affect nominal variables, rather than real variables; therefore, an increase in the money supply would increase all prices and wages proportionately, but have no effect on real economic output (GDP), unemployment levels, or real prices (prices measured against a base index)

Question 3

Money Creation and Fractional Reserve Banking

Answer 3

Banks do not have to hold all their deposits but only a fraction of its value. Thus, creating money during the process

Question 4

Money Multiplier

Answer 4

1/ Reserve requirement The lower is the reserve requirement in a banking system, the larger is the money multiplier

Question 5

Narrow and broad money

Answer 5

Narrow Money is notes and coins in circulations Broad money = Narrow money + very liquid assets such as bank deposits

Question 6

Goals Central Bank

Answer 6

Price Stability, Full Employment, Real Growth ex-inflation

Question 7

Tools of Monetary Policy

Answer 7

Open Market Operations (OMO); Refinancing Rate (Repo); Reserve Requirements

Question 8

Open Market Operations (OMO)

Answer 8

OMO involves the purchase and sale of government bonds and other securities from and to commercial banks and/or designated market makers

Question 9

The Policy Rate

Answer 9

It’s the rate at the Central Bank is willing to lend to commercial banks

Question 10

Repurchase Agreements (Repos)

Answer 10

Question 11

Name of the rate which banks can borrow in UK, US and Eurozone

Answer 11

UK = Repo rate US = Discount Rate Eurozone = Refinancing rate They’re all the same but with different toponyms

Question 12

Federal Funds Rate

Answer 12

It’s the interbank lending rate on overnight borrowings of reservers. It’s call Libor in UK and Euribor in Eurozone. The Federal Open Market Committee (FOMC) seeks to move this rate to a target level by reducing or adding reserves to the banking system by means of OMO

Question 13

The Transmission Mechanism

Answer 13

Question 14

What do we need to know to use the transmission mechanism?

Answer 14

• The economy’s position in the economic cycle
• The economy’s trend growth
• The natural rate of interest

Question 15

What’s the output gap?

Answer 15

Economies expand and contract over time but the tend to cycle around a positive trend. This is known as output gap.

Output gap = Actual GDP - GDP potential

Question 16

How is the output gap measure?

Answer 16

It requires an estimate of trend growth

Question 17

What determines trend growth?

Answer 17

• Quantities of Capital and Labour employed
• How hard theses resources are worked
• How efficiently these resources are combined by entrepeuneurs