Topic 2: Central Banks & Regulations

Question 1

OMO

Answer 1

Open market operations

Used by CBs to prevent drastic changes to interest rate and effect changes in interest rate.

Question 2

Monetary policies

Answer 2

Influence MS.
Influence IR.

OMO
Buy securities from FI to inject funds/cash/liquidity into FS - IR down.

Sell securities from FI to reduce funds/cash/liquidity into FS - IR up.

Question 3

Systemic risks

Answer 3

Risk of collapse of 1 FI will adversely affect other FIs leading to a FS collapse.

Question 4

Quantitative Easing (Q.E.)

Answer 4

Fed buys securities from FIs to pump liquidity into the FS.

IR falls sharply due to increase in liquidity/MS.

Question 5

Keynesian theory

Answer 5

Demands creates supply.

During bad times, gov could influence through fiscal (G spending) or monetary policies (interest rates).

Causes increase in budget deficit and government borrowing.