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economics > monetary policy > Flashcards

monetary policy Flashcards

1
Q

what are the four functions of money

A
  • a medium of exchange
    -a measure of value
    -a store of value
    -method of deferred payment
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2
Q

what is the money supply

A

the stock of currency and liquid assets in the economy

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3
Q

what is narrow money

A

physical money and deposits and liquid assets in the bank

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4
Q

what is broad money

A

the entire money supply

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5
Q

what is the money market

A

the market in which liquid assets are traded, used to borrow and lend in the short term

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6
Q

capital market

A

where debt and capital instruments are bought and sold

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7
Q

what is the foreign exchange market

A

the market where currencies are traded mainly done by international banks

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8
Q

roles of financial markets in the wider economy

A

-to facilitate saving
-lend to businesses and individuals
-to provide markets with currencies and commodities
-provide market for equities

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9
Q

what is debt

A

money which has been borrowed from the bank, and the loan is later repaid with interest rates

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10
Q

what is equity

A

a stock or security which represents interest in owning e.g a firm,car or house

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11
Q

why is there an inverse relationship between market interest rates and bond prices

A

-when a bond is bought, money is lent to the borrower
-if the interest rate falls, the bond is worth more as it carries a higher IR than current market conditions and vice versa
-

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12
Q

what is a coupon

A

bond interest payment

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13
Q

what is the maturity of a bond

A

the time the financial asset is outstanding

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14
Q

ways in which firms raise finances

A

issuing coroporate bonds
issuing shares
borrowing from a bank

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15
Q

why are corporate bonds isued

A

to fund large projects
-develop a product
-expand firm
-takeover another firm

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16
Q

what to do commercial banks do

A

-manage checkes, loans and deposits for individuals and firms

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17
Q

what do investment banks do

A

-facilitate the trade of stocks, bonds etc

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18
Q

4 main functions of commercial banks

A

-accept deposits
-provide loans
-provide overdraft
-investment of funds

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19
Q

what does the commercial banks balance sheet show

A

the value of a companys assets, liabilities and owners equity

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20
Q

3 main objectives of a commercial bank

A

-liquidity
-profitability
-security

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21
Q

main object - liquidity

A

how easy it is to turn the assets into cash, in order to be profitable banks must have cash
if liquidity is prioritised, profits will be low
cash is the most liquid
loans and long term bonds are the least liquid
if banks can borrow easily they will keep less liquid

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22
Q

main objective - profitbailty

A

to be able to pay their depositers interest, wages and general costs. lots of funds in cash means profitabilty is limited
liquidity and safety are more prioritised

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23
Q

main objective - security

A

have to try and maintain the safety of their assets
banks face uncertainties such as if loans will be repaid or not and in what time
a bank has to keep high portions of their liquid to itself and the central bank
banks only hold their safest assets so more credit cannot be created

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24
Q

how do banks make credit

A
  • M1 money includes checkable deposits
    -must keep enough money to meet liabilities, and the rest it can lend
    -there a multiple banks in system, so only required to hold a fraction of deposits, and rest ends up in other banks
    -this increases the money supply
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25
Q

banks create credit by doing what

A

loaning individuals and businesses moneypartly made up of deposits

26
Q

what increases when commercial banks also involve in investment banking

A

systemic risk

27
Q

3 main functions of a central bank

A

implement monetary policy
lender of last resort
bankers to the government

28
Q

what does monetary policy in the central bank involve

A

influencing IR, the supply of money and exchange rates

29
Q

the role of the MPC

A

alter interest rates to control supply of money

30
Q

who is the base rate controlled by

A

the central bank

31
Q

factors considered by the MPC when setting the bank rate

A

unemployment
savings rate
consumer spending
exchnage rate
high commodity prices

32
Q

how does a change in the exchnage rate effect AD

A

depreciation- exports become cheaper, so export more and reduce trade deficit

33
Q

issues with depreciation of exchange rate

A

inflationary pressure as increases price of imports
production costs for firms increase
causes cost push inflation

34
Q

why do high IR attract foreign direct invetsment

A

the rate of return on investment is higher
which increases demand for the currency (appreciation of the currency)

35
Q

effect of lower IR on exchange rate and trade

A

-hot money flows out of the economy, increasing supploy of the sterling
-fall in demand for pound
-causing currency to depreciate
-imports become more expensive and exports cheap (SPICED)
-M falls and X rises, so AD rises

36
Q

what is the transmission mechanism

A

the process in which AD and the economy is effected by monetary policy decisions

37
Q

monetary policy definition

A

using interest rates and monetary tools to influence levels of consumption and agreggate demand

38
Q

2 main aims of monetary policy

A
  • low inflation rate. the UK CPI target is 2%

-stable economic growth

39
Q

what does increasing money supply increase

A

demand for commodities and investment

40
Q

what does lowering money supply do

A

decreases demand

41
Q

what is quantative easing

A

-creation of money to buy assets e.g govt bonds
-aims to increase money supply

42
Q

example of large cut in interest rates

A

financial crisis 2008/9 the BofE cut IR from 5% to 0.5%

43
Q

limitations of monetary policy

A

liquidity trap
effects on the exchange rate
TIME LAGS

44
Q

2 things the government will use to regulate financial market

A

regulations and guidelines

45
Q

what organisations regulate the UK financial system

A

prudential regulation authority PRA
financial conduct authority FCA
financial policy committee FPC

46
Q

what is the role of the FCA

A

-ensure financial firms are being honest to customers and protect customer interests
-to promote competition

47
Q

role of the PRA

A

promote the safety and stability of banks and ensure policyholders are protected

48
Q

role of the FPC

A

regulates the risks in banking and ensures the financial system is stable

49
Q

reasons why a bank might fail

A

risky loans
when value of liabilities is higher than the value of assets
poor credit of borrowers

50
Q

risk involved with long term loands and short term borrowing

A

-lose money on investment
-insufficient funds in vault
-unable to provide depositers money when demanded

51
Q

what is moral hazard

A

engaging in riskier behaviour with insurance than they would without it, because it makes the borrower less likely to pay

52
Q

what is systemic risk

A

the damage on the economy or financial market e.g the risk of a collapsed bank

53
Q

what is the liquidity ratio used to determine

A

how able a company is to pay off short term loans. the higher the liquidity ratio the greater the safety market of the bank

54
Q

what is the capital rato

A

a comparison between the equity capital and the risk weighted assets of a bank, determined by the financial strength of the bank

55
Q

what is equity capital

A

the amount of money collected by owners of firms in exchange for a portion of shares of a company

56
Q

main functions of a commercial bank

A

accept deposits - fixed or demand deposits
usually have rate of interest return on

provide loans - create credit

investment of surplus funds e.g. government bonds and treasury bills to earn a return

57
Q

liabilities are made up of…

A

cash, deposits, , borrowing nd reserve fundsa

58
Q

assets are made up of …

A

cash, securities and bills, loans and investments

59
Q

function of CB - monetary stability

A

ensure stable prices and confidence by meeting the inflation target
difficult since 2008 crash

60
Q

function of CB - financial stability

A

overseeing efficient flows of money and savings and confidence in financial intermediaries
depositors need to know that their savings are safe an that banks are lending to others responsibly

61
Q
A

economics (33 decks)

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