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ECO1017 > The monetary system > Flashcards

The monetary system Flashcards

1
Q

Define medium of exchange

A

An item that buyers give to sellers when they want to purchase goods and services. It is anything that is readily acceptable as payment

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2
Q

Define unit of account

A

The yardstick people use to post prices and record debts

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3
Q

Define store of value

A

An item that people can use to transfer purchasing power from the present to the future

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4
Q

Define liquidity

A

The ease with which an asset can be exchanged into the economy’s medium of exchange

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5
Q

Define commodity money

A

This is a form of commodity with intrinsic value such as gold or cigarettes

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6
Q

Define fiat money

A

This does not have intrinsic value

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7
Q

Give 3 examples of fiat money

A

Coins, currency, current account deposits

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8
Q

Why is fiat money used?

A

Because of government decree

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9
Q

Define currency

A

The paper bills and coins in the hands of the public

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10
Q

Define demand deposits

A

Balances in bank accounts that depositors can access on demand by writing a cheque or using a debit card

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11
Q

Define central bank

A

An institution designed to oversee the banking system and regulate the quantity of money in the economy

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12
Q

When is a central bank required?

A

Whenever an economy relies on fiat money

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13
Q

Define money supply

A

The quantity of money available in the economy

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14
Q

What happens when too much money is printed?

A

Prices tend to rise

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15
Q

Why is the regulation of money supply a crucially important task?

A

Because if too much money is printed, prices will rise

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16
Q

Define monetary policy

A

The set of actions taken by the central bank in order to affect the money supply

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17
Q

What is the European Central Bank?

A

This is the overall central bank of the 19 countries comprising the European Monetary Union

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18
Q

Why did the ECB come into being?

A

11 countries wanted to use the same currency and be part of the European Monetary Union

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19
Q

What is the main aim of the ECB?

A

Promote price stability throughout the euro area

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20
Q

What is an important feature of the ECB and the Eurosystem?

A

Independence

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21
Q

What is the Bank of England?

A

The central bank of the UK

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22
Q

What is the primary duty of the Bank of England?

A

To deliver price stability

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23
Q

What is different about the Bank of England compared to the ECB?

A

The Bank of England does not have the freedom to define for itself what is meant by price stability, this is done by the UK government

24
Q

What is the Federal Reserve (Fed)?

A

The central bank of the USA

25
Q

Who runs the Fed?

A

A Board of Governors, which has 7 members

26
Q

Who appoints the 7 members of the Fed?

A

The US president

27
Q

What two things can banks influence?

A

The quantity of demand deposits in the economy and the money supply

28
Q

Define reserves

A

Deposits that banks have received but have not loaned out

29
Q

What happens in a fractional-reserve banking system?

A

Banks hold a fraction of the money deposited as reserves and lend out the rest

30
Q

Define reserve ratio?

A

This is the fraction of the deposits that banks hold as reserves

31
Q

What happens to the money supply when a bank makes a loan from its reserves?

A

The money supply increases

32
Q

What is the money supply affected by?

A

The amount deposited in the banks and the amount that banks loan

33
Q

What are deposits into a bank recorded as?

A

Both assets and liabilities

34
Q

What becomes an asset to a bank?

A

Loans

35
Q

What does a T account show?

A

A banks deposits, loans and reserves

36
Q

What can you work out from a T account?

A

The reserve ratio

37
Q

How can you work out the reserve ratio from a T account?

A

Divide reserves by the total assets

38
Q

What happens to the money that one bank loans?

A

The money is deposited into another bank which creates more deposits and reserves that are lent out

39
Q

Define money mulitplier

A

The amount of money the banking system generates with each unit of reserves

40
Q

How can you work out the money supply from the T accounts of multiple banks?

A

Add up each banks total assets

41
Q

What are 3 main tools that a central bank has?

A

Open-market operations
Changing the market reserve requirement
Changing the refinancing rate

42
Q

How does a central bank conduct open-market operations?

A

It does this buy buying government bonds from, or sells government bonds to the public

43
Q

What happens when the central bank buys government bonds?

A

The money supply increases

44
Q

What happens when the central bank sells government bonds?

A

The money supply decreases

45
Q

What is the refinancing rate?

A

This is the interest rate the ECB lends on a short-term basis to the euro area banking sector

46
Q

What happens to the money supply if the refinancing rate decreases?

A

The money supply increases

47
Q

What happens to the money supply if the refinancing rate increases?

A

The money supply decreases

48
Q

What is the refinancing rate called in the USA?

A

The discount rate

49
Q

What is the refinancing rate called in the UK?

A

The repo rate

50
Q

What are reserve requirements?

A

These are regulations on the minimum amount of reserves that banks must hold against deposits

51
Q

What does increasing the reserve requirement do to the money supply?

A

It decreases the money supply

52
Q

What does decreasing the reserve requirement do to the money supply?

A

It increases the money supply

53
Q

How often are reserve requirements changed?

A

Very rarely

54
Q

Which bank no longer sets reserve requirements?

A

The Bank of England

55
Q

What are two problems for central banks because of fractional-reserve banking?

A

The central bank does not control the amount of money that households choose to hold as deposits in banks
The central bank does not control the amount of money bankers choose to lend

56
Q

What does securitization do?

A

It takes loans off the balance sheet so that the banks does not have to set aside reserves to cover these loans, increasing the bank’s scope for increasing lending

57
Q

Why did banks stop lending causing the 2008 credit crunch?

A

Mortgages were failing

ECO1017 (16 decks)

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