Money Market

Question 1

Money

Answer 1

Medium of exchange (batter than barter )
Store of wealth
Unit of account

-Means of establishing value of future claims and payments

Inflations is destabilising as jt messes up these important functions

Question 2

Definitions of money UK and eurozone

Answer 2

M0- cash in circulation + central bank reserves

Narrow money-
Broad money

Question 3

Types of commercial bank

Answer 3

Retail banks- retail deposits and loans

Wholesale banks- wholesale Deposits and loans

Universal banks: conducting retail and wholesale banking

Other- e.g. Building societies

The regulatory environment of the financial sector

Question 4

Commercial banks : key functions

Answer 4

Deposit taking and lending

Financial intermediation:

Expert advice 
Expertise in channeling funds 
Maturity transformation 
Risk transformation 
Transmission of funds

Question 5

Banks balance sheet

Answer 5

Banks liabilities :

Sight deposits
Time deposits
CD,Repos, etc

Banks assets

Cash and reserve balances with BofE
Short term loans
Long term Loans

Question 6

Liquidity in the money market

Answer 6

The discount and repo markets -
-Help banks smooth short run fluctuations of money demand

Repos- BOE buys gilts from banks at a fixed price/ date. Maturity life: usually 2 weeks

Also overnight repos

Rediscounting: private banks sell T bills back to BoE prior to maturity (which buys them at a discount price)

• The parallel money markets: bank to bank lending

Question 7

The role of the central bank

Answer 7

Note issue 
Banking functions 
Management of governments borrowing programme 
Provider of liquidity to banks 
Operates monetary policy 
Manages reserves

Question 8

The supply of money

Answer 8

Banks reduce liquidity ratio
Non bank private sector chooses to hold less cash
Inflow of funds from abroad
A public sector deficit

Question 9

Money demand

Answer 9

Motives for holding money : liquidity(L1)
-transactions and precautionary demand for Money(L1)

Speculative (assets) demand for money :
The rate of interest (L2)
Changes in price of securities and other assets
The exchange rates

Total demand for money -L1+L2

Question 10

Equilibrium in money markets

Answer 10

Equilibrium rate of interest

• effects of changes in the money supply or demand on the rate of interest

Question 11

Monetary transmission mechanisms

Answer 11

Interest rate transmission mechanism

Money supply ^ -> interest rate ¥ -> investment ^ saving ¥ -> AD ^