Money and Interest Rates

Question 1

Monetary base

Answer 1

• Bills and coins in circulation plus deposits that banks have in the central bank

Question 2

M1

Answer 2

• Bills and coins among the general public plus “demand deposits” (“immediately available funds”)

Question 3

M2

Answer 3

• M1 plus deposits that cannot be immediately withdrawn (deposits tied for a certain time etc.)

Question 4

M3

Answer 4

• M2 plus money market fund shares and certain debt securities

Question 5

Money Demand

Answer 5

If you choose to have £1000 in cash, £2000 in your bank account and £7000 in government bonds, your demand for money will be £3000.

Question 6

Money is either created by

Answer 6

Central Bank or Commercial Banks (credit process)

Question 7

Open Market Operations (OMOs)

Answer 7

The CB controls the money supply by regulations (such as reserve-deposit ratios) and changing the monetary base (H).
- Open Market Purchase or Sale

Question 8

Increasing Money Supply (Open-Market Purchase)

Answer 8

The CB buys financial assets, typically government bonds, from the public to increase money supply
This money will be deposited at the banks

Question 9

Decreasing money supply (Open-Market Sale)

Answer 9

The CB sells government bonds

Question 10

Money Supply Curve

Answer 10

Vertical, independent of the interest rate

- Only moves when the CB decides it should. All other times we move along the curve.

Question 11

The main refinancing rate

Answer 11

The interest rates the commercial banks pay to borrow reserves from ECB