Money and Banking

Question 1

3 roles of money

Answer 1

Medium of exchange
Store of wealth
Unit of account

Question 2

3 Issues regulating money

Answer 2

Internationalisation of finance makes it hard for central banks to control money supply
Any loopholes in restrictions are quickly exploited
Technological advances has led to increase in ‘off shore’ financial centres and shadow banking

Question 3

What are the roles of the central bank in the money market? (3)

Answer 3

Banker to gov and commercial banks
Set regulation and conducts gov monetary policy
Directly controls money circulation

Question 4

What is the role of commercial banks

Answer 4

financial intermediaries that match agents with surplus funds with agents with deficient to the best employment

Question 5

3 Main ways to control money supply

Answer 5

Open market operations
Changing the legally required cash reserve ratio
Interest rate

Question 6

4 Causes of the finance sectors growth

Answer 6

Trade
Deregulation
Innovation
Risk

Question 7

Trade cause

Answer 7

Small deregulated markets saw high profit and low cost

Deregulation ed to trade surpluses being diverted into finance

Question 8

Deregualtion

Answer 8

Growth of banks through mergers and acquisitions allowed created a powerful lobby
International transactions increased ease

Question 9

Innovation cause

Answer 9

Attempts to limit credit supply increased IR leading to innovation of financial market

Question 10

Risk cause

Answer 10

ER’s no longer fixed risked depreciation

Banks created derivatives/Capital asset pricing models to ensure against risk

Question 11

Debt,boom and bust

Answer 11

Debt helps grow the bank and economy
Eventually banks run out of reliable investments and become reckless e.g. invest in real estate
This creates a speculative bubble that bursts creating a bust