Money and interest rates

Question 1

Narrow money

Answer 1

Broadly defined as notes and coins in circulation with the public

Question 2

Broad money (known as M4)

Answer 2

Lending by UK banks and building societies to the private sector

Question 3

Yield

Answer 3

The interest rate or dividend, expressed as a percentage of the price of the asset. E.g. a security with a price of £80 that pays interest of £8 per year has a yield of 10%.

Question 4

Positive or upward sloping yield curve

Answer 4

Where long-term interest rates are above short-term interest rates

Question 5

Negative or inverted yield curve

Answer 5

Where short-term interest rates are above long-term interest rates

Question 6

Liquidity theory (structure of yield curve)

Answer 6

Investors will demand an extra reward (higher interest) for investing their money for a longer period

Question 7

Expectations theory (structure of yield curve)

Answer 7

The yield curve represents investors’ views on the likely future movement of short-term interest rates. If they expect interest rates to rise then the yield curve will be upward sloping; if they expect rates to drop it will be downward sloping.

Question 8

Market-segmentation theory (structure of yield curve)

Answer 8

The markets for different maturities of debt instruments are entirely separate. Within each segment interest rates are set by supply and demand.

Question 9

Savings ratio

Answer 9

The proportion of income which is saved