The financial markets, money and the monetary system.

Question 1

What is the refinancing rate?

Answer 1

Setting the refinancing rate is a special form of an open market operation. It involves the purchase of non-monetary assets together with an agreement to sell them back later. Hence, the central bank has effectively made a loan and taken the non-monetary assets as collateral for the loan.The interest rate is simply the difference between the price the bank sells the
asset to the central bank and the price it agrees to buy it back. If the ECB raises the refinancing rate by not granting new loans or renewing old loans via a repurchase agreement, the money supply decreases.

Question 2

What are reserve requirements?

Answer 2

Reserve requirements are regulations on the minimum amount of reserves that banks must hold against deposits. It determines how much new money the banking system can create with each euro of reserves via fractional reserve operations. An increase in the reserve ratio lowers the money multiplier and decreases the money supply.

Question 3

What is quantitative easing and in what way does it hep to counter slow economic growth in an economy?

Answer 3

QE is a special form of outright open-market operations with the goal of removing toxic debt from the balance sheets of private banks thereby sustaining solvency for over-debted and insolvent financial institutions. The increase in reserves of these financial institutions should encourage them to lend it out to businesses and consumers.

Question 4

Applications

Answer 4

Look at PDF page 16

Question 5

What is the money multiplier and how is it calculated?

Answer 5

The money multiplier it the reciprocal of the reserve ratio.

Question 6

With reserves of EUR 100 and a reserve ratio of 2%, how much money can possibly be created by fractional reserve banks?

Answer 6

Reserves/Deposits = 2% (0.02) Money multiplier = 1/0.02 = 50
50* EUR 100 = EUR 5,000 can be created with initial reserves of EUR 100.