Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

Financial institutions and markets > roles of government > Flashcards

roles of government Flashcards

1
Q

What are the 4 economic goals for any modern economy?

A

• avoid too much inflation
• achieve full employment
• achieve sustainable economic growth-economic prosperity
• achieve a stable currency & strong international payments
position

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

do banks need capital reserves to operate?

A

yes the reserves are set by law or convention

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

monetary policy

A

it is concerned with control of amount of money in circulation i.e. money supply & its growth

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

what is the purpose of monetary policy and how does it try to achieve this?

A

• Used (along with fiscal policy) to prevent wide swings from high peaks to low troughs in business cycles

• Monetary policy - directed at influencing level of interest rates
by targeting a base cash rate

  • MP to try to stimulate economy - reduce interest rates
  • Reducing interest rates should lead to better economic growth

• MP to try to slow down economic growth - increase interest
rates

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

Relationship between Central Banks and

Governments

A
  1. A Govt sets monetary policy & central bank implements it.
    Case in NZ up to 1986.
  2. A Govt sets monetary objectives within certain constraints -
    central bank free to achieve objectives. Case in NZ now.
  3. Monetary policy objective set in legislation - central bank free
    to follow whatever course of action it sees fit to achieve
    objective.
    Case in Euro area & Switzerland.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

what is NZ monetary policy objective?

A

objective under 1989 RB Act: to control inflation &

keep in band (stable prices)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

who has to agree on a Policy target agreement?

A

Treasurer & Governor

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

what does OCR stand for?

A

Official Cash Rate

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

What rate does the RBNZ target?

A

The official cash rate (OCR)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Who controls the currency?

A

The RBNZ control the currency and sells (issues) cash to the banks that need it

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

what does RBNZ stand for?

A

Reserve bank of NZ

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

How many times a year is the OCR reviewed?

A

8 times a year & changes 25 bp or multiple.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

what rate does the reserve bank (RB) borrow & lend at?

A

borrows and lends at OCR

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

WHAT RATE IS USED IF BANKS WANT CASH OVER NIGHT?

A

banks are charged interest rate 0. 50% above OCR

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

what is reverse repurchase agreement?

A

purchase of securities
with the agreement to sell them at a higher price at a
specific future date. (RBNZ)

• For the party selling the security (& agreeing to buy it
back in future-bank) it is a repo; for the party on the other
end of the transaction (buying the security & agreeing to
sell in the future) it is a reverse repurchase agreement
.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

what are the Transmission Channels for monetary policy?

A
  • Monetary policy channel
  • Credit channel
  • Wealth channel
  • Foreign exchange channel
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

Monetary policy channel

A
  • increase in OCR by RBNZ
    (This is a tool of monetary policy)
    Then  increase in other S/T rates as price of money bid up,
    usually firstly S/T money market securities rates increase
    e.g. bank-accepted bills- large company borrowing.
    Then costs of funds for banks  so they increase deposit rates
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

Credit channel

A
  • increase in OCR rise in investment risk 
    bank lending may fall as borrowers come under stress due to
    higher interest costs so less credit available
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

Wealth channel

A
  • higher interest rates  decrease in asset
    values  loss of confidence for companies & households 
    decrease in economic activity
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

Foreign exchange channel

A
  • rise in OCR  higher exchange rate
     exports may fall due to higher cost whereas import prices fall
     harmful effect on balance of trade & economic output
21
Q

what are the immediate effect of Monetary policy channel?

A
  • Short term interest rates e.g. overnight rates
  • Wholesale S/T interest rates
  • Foreign exchange rates
22
Q

what are the intermediate economic indicators Transmission Channels for monetary policy?

A
  • money/credit- e.g. deposit rates, floating mortgage rates
  • asset prices- bond and equity
  • economic activity
  • domestic demand
23
Q

what is fiscal policy and what are the instruments of it?

A

• Fiscal policy is concerned with govt.’s income & spending

• Tools (Instruments of fiscal policy) are:
– taxes,
– government spending or outlays &
– transfer payments

24
Q

what is a budget deficit?

A

where government spending > income (from

taxes & other sources e.g. interest, fees & fines)

25
Q

(1) what options can a govt use if its in a recession and wants to stimulate an economy but has a budget deficit?

A

one option is to borrow so its expenditure (G)
increases

  • Borrowing from the domestic market
  • Borrowing funds from overseas markets

the other option is govt. can reduce taxes to stimulate the economy

26
Q

(1) • Borrowing from the domestic market

A

central bank issues $100m govt bonds to borrow.
- If govt spends all funds
 no change in money supply.
 Increase in real gross domestic product (GDP) in short-run
If one-off borrowing, first, upward pressure on ST interest rates

27
Q

(1) • Borrowing funds from overseas markets

A
  • initially, no impact on local borrowing, then either inflationary
    or growth creating (
     in govt expenditure
     increase in real
    gross domestic product (GDP) in S/T, & likely an increase in
    taxes paid)
  • Long term
     the govt. debt has to be repaid with interest

    contractionary impact on economic growth in L/T.
28
Q

(1) reduce taxes to stimulate the economy

A

expansionary fiscal policy-  consumers have more disposable income & in short-run, stimulatory fiscal policy will increase real GDP

29
Q

Contractionary fiscal policy in regards to budget deficit

A

it could cut its
expenditure (spending) (G) overall

.- or raise taxes  people will consume less as their net
disposable income drops

  • or reduce transfer payments- targeted groups spend less
30
Q

whatis a budget surplus?

A

where income exceeds expenditure:

31
Q

(2) what are the govt options with a budget surplus?

A

• Options: Govt can retire debt or cut taxes or build up assets or
increase govt. spending.

• Impact of govt debt retirement on the economy & the financial
system depends partly on who holds the debt securities

32
Q

(2)• Retirement of Govt Debt held by domestic market

A

interest rates may fall when govt security holders save the
money they receive & govt need for funds drop.
Also govt risk drops.

33
Q

(2) • Retirement of Govt Debt held by overseas institutions

A

more independent policy setting regime.
Initially, no demand ↓ for domestic loanable funds  no
impact on interest rates.
- But retirement of debt makes govt safer (credit rating) &
reduces need to service debt with interest so interest rates
should fall 

34
Q

What are some issues relating to govt debt?

A

• Amount of debt usually compared with GDP- actual percentage an indication of easily it can be paid back

• Preserving an efficient capital market
- Argument for
preserving the liquidity of key benchmark maturities

• The reason for borrowing the money.
- If it is borrowed for
productive purposes e.g. to invest in infrastructure, then ability to
repay may not be an issue.

35
Q

what relationship do GDP and employment have?

A

if GDP increases then employment increases and vice versa

36
Q

importance of fiscal policy?

A

• For countries continually running a budget deficit, risk profile of country higher, so too is interest rates, & money has to be
borrowed from mainly off-shore to fund it.

37
Q

(3) functions of RBNZ?

A
  • Monetary policy formulation(control of MS) & credit supply
  • Domestic market operations
  • Prudential supervision
  • Depository & settlement services
  • Currency
  • Foreign reserves management
  • Crisis management.
38
Q

(3) Domestic market operations

A
  • operating as settlement bank
    for financial system. ESAS system processes settlement
    accounts.
  • over $25.9 billion worth of daily transactions in 2014
39
Q

(3) • Crisis management.

A

– Acting as lender of last resort for the financial system BUT
no guarantee of banks’ deposits & no deposit insurance
under usual conditions

40
Q

(3) Depository & settlement

A
  • oversight of payments system
41
Q

(3) prudential supervision

A

supervisory role to all non-bank bank deposit
takers (NBDTs) such as insurance companies, deposit-taking
finance companies, non-deposit taking finance companies

42
Q

Basel I Guidelines on capital adequacy

A

• Capital adequacy focused on level of credit risk with defined
capital & statement of minimum capital ratio, risk weighting of
balance sheet assets & conversion of OBS items to ‘balance
sheet equivalents’ & risk-weightings

43
Q

Basel II Capital Accord Framework- 1. Definition of bank capital

A

(1)Tier 1 - the core capital or highest quality (lowest risk)
Characteristics: permanent commitment of funds i.e. readily
available & rank behind claims of depositors if winding up bank

e.g. • paid-up ordinary shares
• retained earnings
• current year’s earnings
• non-cumulative, irredeemable preference shares

44
Q
  1. Basel II Capital Accord is made up of three pillars:
A

Pillar One- capital adequacy

  • Pillar Two- supervisory review
  • Pillar Three- market discipline & disclosure
45
Q

Pillar 1: operational risk

A
  • internal and external fraud
  • employment practices and workplace safety
  • clients, products and business practices
  • damage to physical assets
  • business disruption and system failures
  • execution, delivery and process management
46
Q

Pillar 2: Supervisory Review

A

•Supervisors to ensure banks have sufficient capital & to
encourage development of, and improvement of existing risk
management policies- four guiding principles

47
Q

Pillar 3: Market Discipline

A

• Designed to reinforce market discipline in banks’ capital
adequacy

• Note NZ has been leader in this aspect- requiring banks to
disclose quarterly relevant & quantitative info relating to their
risks, & capital adequacy

48
Q

two possible ways banks can increase capital ratio?

A
  1. Find more capital
    - could involve rights issue, reducing dividends, raising
    money through other forms e.g. non-cumulative perpetual
    preference shares
  2. Reduce assets
    - selling off subsidiaries, securitisation of loans.

Financial institutions and markets (12 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions