monetary policy

Question 1

what are the four functions of money

Answer 1

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

Question 2

what is the money supply

Answer 2

the stock of currency and liquid assets in the economy

Question 3

what is narrow money

Answer 3

physical money and deposits and liquid assets in the bank

Question 4

what is broad money

Answer 4

the entire money supply

Question 5

what is the money market

Answer 5

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

Question 6

capital market

Answer 6

where debt and capital instruments are bought and sold

Question 7

what is the foreign exchange market

Answer 7

the market where currencies are traded mainly done by international banks

Question 8

roles of financial markets in the wider economy

Answer 8

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

Question 9

what is debt

Answer 9

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

Question 10

what is equity

Answer 10

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

Question 11

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

Answer 11

-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
-

Question 12

what is a coupon

Answer 12

bond interest payment

Question 13

what is the maturity of a bond

Answer 13

the time the financial asset is outstanding

Question 14

ways in which firms raise finances

Answer 14

issuing coroporate bonds
issuing shares
borrowing from a bank

Question 15

why are corporate bonds isued

Answer 15

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

Question 16

what to do commercial banks do

Answer 16

-manage checkes, loans and deposits for individuals and firms

Question 17

what do investment banks do

Answer 17

-facilitate the trade of stocks, bonds etc

Question 18

4 main functions of commercial banks

Answer 18

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

Question 19

what does the commercial banks balance sheet show

Answer 19

the value of a companys assets, liabilities and owners equity

Question 20

3 main objectives of a commercial bank

Answer 20

-liquidity
-profitability
-security

Question 21

main object - liquidity

Answer 21

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

Question 22

main objective - profitbailty

Answer 22

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

Question 23

main objective - security

Answer 23

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

Question 24

how do banks make credit

Answer 24

• 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

Question 25

banks create credit by doing what

Answer 25

loaning individuals and businesses moneypartly made up of deposits

Question 26

what increases when commercial banks also involve in investment banking

Answer 26

systemic risk

Question 27

3 main functions of a central bank

Answer 27

implement monetary policy lender of last resort bankers to the government

Question 28

what does monetary policy in the central bank involve

Answer 28

influencing IR, the supply of money and exchange rates

Question 29

the role of the MPC

Answer 29

alter interest rates to control supply of money

Question 30

who is the base rate controlled by

Answer 30

the central bank

Question 31

factors considered by the MPC when setting the bank rate

Answer 31

unemployment savings rate consumer spending exchnage rate high commodity prices

Question 32

how does a change in the exchnage rate effect AD

Answer 32

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

Question 33

issues with depreciation of exchange rate

Answer 33

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

Question 34

why do high IR attract foreign direct invetsment

Answer 34

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

Question 35

effect of lower IR on exchange rate and trade

Answer 35

-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

Question 36

what is the transmission mechanism

Answer 36

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

Question 37

monetary policy definition

Answer 37

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

Question 38

2 main aims of monetary policy

Answer 38

- low inflation rate. the UK CPI target is 2% -stable economic growth

Question 39

what does increasing money supply increase

Answer 39

demand for commodities and investment

Question 40

what does lowering money supply do

Answer 40

decreases demand

Question 41

what is quantative easing

Answer 41

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

Question 42

example of large cut in interest rates

Answer 42

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

Question 43

limitations of monetary policy

Answer 43

liquidity trap effects on the exchange rate TIME LAGS

Question 44

2 things the government will use to regulate financial market

Answer 44

regulations and guidelines

Question 45

what organisations regulate the UK financial system

Answer 45

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

Question 46

what is the role of the FCA

Answer 46

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

Question 47

role of the PRA

Answer 47

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

Question 48

role of the FPC

Answer 48

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

Question 49

reasons why a bank might fail

Answer 49

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

Question 50

risk involved with long term loands and short term borrowing

Answer 50

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

Question 51

what is moral hazard

Answer 51

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

Question 52

what is systemic risk

Answer 52

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

Question 53

what is the liquidity ratio used to determine

Answer 53

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

Question 54

what is the capital rato

Answer 54

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

Question 55

what is equity capital

Answer 55

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

Question 56

main functions of a commercial bank

Answer 56

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

Question 57

liabilities are made up of...

Answer 57

cash, deposits, , borrowing nd reserve fundsa

Question 58

assets are made up of ...

Answer 58

cash, securities and bills, loans and investments

Question 59

function of CB - monetary stability

Answer 59

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

Question 60

function of CB - financial stability

Answer 60

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