Monetary System

Question 1

Good characteristics of money

Answer 1

Durable
Portable
Divisible
Recognisable
Hard to counterfeit

Question 2

Types of money

Answer 2

1) commodity money with intrinsic value- gold

2) fiat money used because gov decree but no intrinsic value- coins

Question 3

Demand deposits

Answer 3

Balances in bank accounts that depositors can access on demand

Question 4

Narrow money M1

Answer 4

All physical money and demand deposits and other liquid assets held by the central gov

Question 5

Role of central banks

Answer 5

Institution designed to oversee banking system and regulate the Q of money in economy
Economy reliant on fiat money needs agency to regulate system
Regulates and controls prices

Question 6

Money supply

Answer 6

Quantity of money available in economy

SR trade off between inflation and unemployment

Question 7

Reserves ratio

Answer 7

Fraction of deposits banks hold as reserves and don’t lend out

Question 8

Functions of money

Answer 8

Medium of exchange
Store of value
–transfer purchasing power present–>future
Unit of account

Question 9

ECB and Eurosystem

Answer 9

12 countries in EMU

Primary objective to promote price stability

Question 10

Sub-prime mortgage crisis

Answer 10

Building CDO
Mortgage lender sell mortgages to investment bank
I Bank turns debt into ASSET BACKED SECURITY (ABS)
Then sell BOND on money markets to banks/financial institutions/larger savers

Question 11

Banks and money supply

Answer 11

Reserves= deposits banks have received but not loaned out

Reserve ratio- fraction deposits banks hold

Question 12

Fractional reserve banking

Answer 12

Banking system which banks hold fraction of deposits as reserves

Question 13

What happens what bank makes loan from reserves

Answer 13

Money supply increases

Question 14

What is money supply affected by

Answer 14

Amount deposited in banks

Amount banks loan

Question 15

Money multiplier

Answer 15

1 / reserves ratio

Question 16

Central banks tools of monetary controls

Answer 16

1) open market operations
2) refinancing rate
3) reserve requirements

Question 17

Open market operations

Answer 17

Increase money supply - create currency and buy bonds from public

Question 18

Refinancing rate

Answer 18

IR at which European Central Bank lends on ST basis to euro area

Question 19

Repo rate

Answer 19

IR at which BofE lends on ST basis to UK banking sector

Question 20

Discount rate

Answer 20

IR at which Federal reserve lends on ST basis to US banking sector

Question 21

Reserve requirements

Answer 21

Regulations on min amount of reserves that banks must hold against deposits

• increase in reserve requirements = banks must hold more reserves and therefore can lend out less of each euro deposited
• increase reserve ratio, decrease money multiplier and decrease monetary policy

Question 22

Problems in controlling money supply

Answer 22

Central bank doesn’t control amount of money that households choose to hold as deposits in banks

Question 23

Toxic debt

Answer 23

Mortgage backed securities and other debt (bonds) that aren’t able to be repaid in many cases because the value of the assets against which they’re secured have decreased significantly