Monetary policy

Question 1

monetary policy

Answer 1

Monetary policy involves management of money supply and interest rate. It’s an economic strategy usually applied through the central bank by the government.

Question 2

central bank

Answer 2

A national bank that provides financial and banking services for its country’s government and commercial banking system, as well as implementing the government’s monetary policy and issuing currency

Question 3

lender of last resort

Answer 3

An institution, usually a country’s central bank, that offers loans to banks or other eligible institutions that are experiencing financial difficulty or are considered highly risky or near collapse

Question 4

currency

Answer 4

A system of money in general use in a particular country

Question 5

money

Answer 5

A current medium of exchange in the form of coins and banknotes.

Question 6

unit of account

Answer 6

A unit of account in economics is a nominal monetary unit of measure or currency used to value/cost goods, services, assets, liabilities, income, expenses, etc.

Question 7

store of value

Answer 7

Is the function of an asset that can be saved, retrieved and exchanged at a later time, and be predictably useful when retrieved.

Question 8

medium of exchange

Answer 8

used to make trading, purchase in goods easier between parties (Currency)

Question 9

liquidity

Answer 9

the ease with which an asset can be transformed into cash

Question 10

M1

Answer 10

Currency and check deposits, the most liquid form money (can be spent immediately)

Question 11

M2

Answer 11

M2 = M1 + some less liquid forms of money, including:
savings deposits and money market deposit accounts
long-term deposits which can only be withdrawn after a certain period of time

Question 12

M3

Answer 12

M3 = M1+M2 + more less liquid forms of money, including:

long-time deposits that require substantial penalties to withdraw before maturity

Question 13

fractional reserve banking

Answer 13

The bank cannot loan out all deposits, it must keep a fraction of it (percentage of the loan)

Question 14

the money multiplier

Answer 14

1/Required Reserve Ratio (Tells you the money made)

Question 15

the required reserve ratio (RRR)

Answer 15

What banks must keep from loans

Question 16

the discount rate

Answer 16

The interest rate the Central Bank charges the commercial banks for borrowing money from the CB

Question 17

open market operations

Answer 17

Open Market Operations refers to the selling and buying of government bonds in order to increase or decrease money supply.

Question 18

government bonds

Answer 18

A bond that is given by the government that has interest rates and it has a promise to be repaid by a certain date.

Question 19

the interbank funds rate

Answer 19

market in which banks extend loans to one another for a specified term

Question 20

expansionary monetary policy

Answer 20

An economy in recession is facing high unemployment and possibly deflation. If the
central bank wishes to stimulate aggregate demand, it must increase the money
supply. To do this it can:
- reduce RRR
-reduce discount rate
-buy bonds on the open market

Question 21

contractionary monetary policy

Answer 21

An economy facing demand-pull inflation with unnaturally low unemployment is over-
heating. To bring inflation down, the central bank has the following policy tools at its
disposal:
-increase RRR
- raise the discount rate
-sell bonds on the open market

Question 22

evaluating monetary policy

Answer 22

• the degree of inflation
• the depth of the recession
• if the economic conditions are right (like a firm willing to invest) expansionary monetary policy can contribute to long run economic growth