Macro Minor

Question 1

Monetary targeting

Answer 1

The central bank announces that they willAchieve certain value of the annual growth rate of monetary aggregate eg 5% growth of M2

Relies on a stable money inflation relationship

Question 2

Inflation targeting

Answer 2

Public announcement of medium-term numerical objectives of inflation

Use more than the money variable to determine the best setting for monetary policy

Question 3

Monetary policy without an implicit nominal anchor example of the United States

Answer 3

Forward-looking behaviour, required by long lags

Fed reserves have a concern to control inflation in the long run

Question 4

Non borrowed reserves

Answer 4

Determined by central banks open market operations

Question 5

Borrowed reserves

Answer 5

Obtained by banks through standing lending facility

Question 6

Open market operations

Answer 6

Purchase or sale of security by CB

Increases the money base by increasing R

Affect H through” non borrowed R”

Question 7

Repurchase agreement

Answer 7

The Bank of England buys security from the commercial bank which agrees to re-purchase it at specified period at a slightly higher price. the effect of this agreement is that the Bank of England has made loan to a commercial back and holds an equivalent value of gilt. the bank repurchases them to pay off the loan

Add to the security of Bank of England and reserves of commercial banks( securities are reduced)

Question 8

Standing lending facility

Answer 8

Collateralised loan by central bank to bank at il

Increasing the money based by increasing reserves of commercial banks(also borrowings

Available at request = “borrowed reserves”

Question 9

Standing deposit facility/Interest on access reserves

Answer 9

Interest paid on funds by Central bank in deposit facility or excess reserves
Id

Question 10

Money market

Answer 10

Market for credit with initial maturity of less than one year

Least price fluctuations least risky investment

Question 11

Examples of money market instruments

Answer 11

Repos
Commercial bills: negotiable unsecured debt securities issued by firm or bank
Treasury bills:Negotiable zero-coupon debt securities issued by government
Eurocurrency:Foreign currency deposits at bank

Question 12

Capital market

Answer 12

Bond market: market for instrument of initial maturity exceeding one year

Equity market:Market for ownership shares in corporations

Question 13

Derivatives market

Answer 13

Market for security staff to ride their value from other underlying assets

Question 14

Interbank deposits

Answer 14

Surplus banks can lend to cash short banks

Question 15

Equity

Answer 15

Claim to partial ownership of corporation which entitles owners to share in profits. typically distributed as periodic payment

Question 16

Securitisation

Answer 16

Process of transforming illiquid financial assets issued by banks into marketable securities

Question 17

Depository institutions

Answer 17

Commercial banks building societies

Question 18

Contractual saving institutions

Answer 18

Insurance companies and pension funds

Acquire funds at periodic intervals on contractual basis

Question 19

Investment intermediaries

Answer 19

Mutual funds : Pool resources of many small investors. Buy and hold diversified portfolio of securities
hedge funds: Acquire funds from large investor. Sell borrowed assets

Question 20

Forward contract

Answer 20

Customised agreement by two parties to buy or sell assets at the agreed price at specific future date
Forward transactions reduce uncertainty by fixing future price

Question 21

Future contract

Answer 21

Standardised negotiable( tradable )forward contract. Future price reflects expected price of underlying asset at expiration date of future contract.

Future prices capture market expectations of underlying asset price

Question 22

Swap

Answer 22

Contracts that obligate to parties to swap one set of payments for another at the agreed rate during a specific period of time

Question 23

Bank capital

Answer 23

The amount the bank could lose on its assets before it becomes insolvent(Unable to pay off its liabilities inc deposits by selling its assets

Question 24

Moral hazard

Answer 24

The possibility that you will take less care to prevent an accident if you are insured against it.
Domestic bank supervision and balance sheet restrictions are necessary to limit the moral hazard resulting from deposit insurance and access to lender of last resort
Otherwise thanks would make excessively risky loans and inadequate provision for the future failure

Question 25

Money multiplier

Answer 25

Any central-bank purchase of assets automatically results in an increase in the domestic money supply

Question 26

Fixing an exchange rate

Answer 26

The bank must be willing to Buy and sell currency at fixed exchange rate

Question 27

Sterilisation

Answer 27

Open market purchase of flooring assets tend to affect the monetary days so do you central-bank carries out an offsetting of the market operation