Macroeconomics 5.1 Money and interest rates Flashcards
What are the functions and characteristics of money?
Functions: * Medium of exchange * Unit of account * Store of value * Standard for deferred payment
Characteristics: * Relatively scarce * Durable * Portable * Acceptable * Divisible * Difficult to forge
What is the difference between narrow and broad money in terms of liquidity?
Narrow money is more liquid and includes cash and central bank reserves. Broad money includes narrow money plus other liquid assets like bank deposits held by banks.
What is the Fisher equation of exchange?
MV = PY, where M = Money supply, V = Velocity of circulation, P = Price level, Y = Real income.
What is the primary influence of monetary policy on the economy?
Monetary policy affects the economy primarily through its influence on aggregate demand.
Complete the following: If inflation is expected to be below the target 2% rate, the Monetary Policy Committee will cut the bank _____________ to try and increase aggregate demand.
rate
What monetary policy is applied when inflation is expected to be above the target rate?
Contractionary monetary policy.
What is the main purpose of the money market?
To manage short-term borrowing and lending of funds.
What is the main purpose of the capital market?
To facilitate the raising of long-term finance through the issuance of stocks and bonds.
How can firms raise finance on the capital market?
By issuing shares or bonds.
What is meant by the term liquidity?
The ease with which an asset can be converted into cash without affecting its market price.
Explain what is meant by ‘debt’ and give examples.
Debt is an obligation to repay borrowed funds, e.g., loans, bonds.
What is a bond?
A bond is a fixed income instrument that represents a loan made by an investor to a borrower.
What is the relationship between market interest rates and bond prices?
There is an inverse relationship; as interest rates rise, bond prices fall.
What is the credit multiplier?
The ratio of the amount of deposits created by banks to the amount of reserves they hold.
What is Quantitative Easing?
A monetary policy where the central bank increases the money supply by purchasing government bonds.
What happens to the demand for £s Sterling if the MPC raises interest rates?
The demand for £s Sterling increases.
How does a high exchange rate affect Aggregate Demand?
It reduces AD by lowering the price of imports and raising the price of exports.
Complete the following: Banks, building societies and insurance companies are examples of ___________________________________.
financial intermediaries.
What is the difference between the primary and secondary capital markets?
The primary market is for new issues of securities, while the secondary market is for trading existing securities.
What are the three most important functions of commercial banks?
- Accepting deposits 2. Making loans 3. Providing payment services.
What is the chain effect of a rise in interest rates on domestic demand?
Higher interest rates lead to lower borrowing, reduced consumer spending, and decreased aggregate demand.
What are the six characteristics of money?
- Relatively scarce * Durable * Portable * Acceptable * Divisible * Difficult to forge
What is the main form of money in an advanced economy?
Bank deposits.
What is the formula for calculating current yield?
Yield = (Coupon / Market Price) x 100.
What is the significance of the velocity of circulation in the Fisher equation?
It represents the rate at which money is exchanged in an economy.
What happens to the market price of a bond when the market interest rate falls?
The market price of the bond increases.
How can the Bank of England affect the lending activities of commercial banks?
By changing interest rates and reserve requirements.
What is the effect of Quantitative Tightening?
It reduces the money supply by selling bonds and increasing interest rates.
