Money and Monetary Institutions

Question 1

Maturity

Answer 1

The date on which an issuer/borrower of a loan/bond must repay the principal amount & interest to the holder/investor

Question 2

What’re the functions of money?

Answer 2

Medium of exchange; means of storing wealth & means of establishing value of future claims & payments

Question 3

How does money get into the economy?

Answer 3

Central banks create the monetary base, made up of notes, coins and bankers’ deposits

Commercial banks create deposit money by expanding loans & deposits

Question 4

Near money

Answer 4

Liquid assets which can readily be converted into cash, e.g. govt securities, foreign currencies, savings accounts

Question 5

Notes and coin

Answer 5

All the currency in circulation outside the BoE

Question 6

Retail M4

Answer 6

UK non-bank, non-building society holdings of notes + coins + retail deposits with UK banks + building societies

Question 7

M4

Answer 7

Retail M4 + all other private sector deposits at banks + building societies + CDs

Question 8

M3

Answer 8

M4 + residents’ foreign currency deposits in UK banks + building societies + public corporations’ sterling & foreign currency deposits in UK banks and building societies

Question 9

Fiat money

Answer 9

Govt issued currency, e.g. sterling

Question 10

What is the ratio approach of creating money?

Answer 10

A commercial bank has to deposit an amount, based on the reserve ratio, to the state bank and may not use this cash

Question 11

Reserve ratio?

Answer 11

Reserve/deposit

Question 12

What is the competitive environment approach of creating money?

Answer 12

Ratio is fixed & banks want to convince customers to increase their deposits so that their reserves will be high

Question 13

What does the IS curve show?

Answer 13

All combo’s of GDP and IR for which aggregate desired spending (AE) = actual output (Y)

Question 14

Function of a central bank?

Answer 14

Plays a large role in the nation’s payments system, provides loans during times of financial stress + oversee commercial banks and financial system to ensure confidence over operations

Question 15

What is the BoE aims?

Answer 15

Decisions made for price stability (inflation target) and secondary aim of supporting govt policies, help meeting targets for growth & employment

Question 16

What is the MPC in charge of?

Answer 16

Sets target rate for monetary policy

Question 17

Fiscal policy

Answer 17

The govt’s decisions about spending + taxes + transfer payments

Question 18

Stabilisation policy

Answer 18

Govt tries to keep output close to its potential level