Week 1

Question 1

What are three functions of money?

Answer 1

Store of Value; Medium of exchange; Unit of account

Question 2

What is conventional monetary policy?

4 syllables in monetary - 4 actions by central bank

Answer 2

Central Bank:
1) Manages interest rate
2) Discount rate
3) Reserve requirements
4) Open Market Operations (buying/selling securities)

Question 3

Explain Open Market Operations and how money is injected and removed.

If the central bank does x money is injected causing interest rate to y

Answer 3

OMO refers to the transactions between a central bank and other banks in regards to securities. If a central bank uys securities, money is injected into the economy reducing interest rates and stimulating the economy. Opposite is true.

Question 4

Explain unconventional monetary policies

Explain it and when it will be used. Explain the three types of uncon

Answer 4

Unconventional monetary policies happens when the economy is in crisis and interest rates no longer influence the economy as intended. The three types are:
1) Negative interest rate
2) Quantative Easing (buying large scale securities en masse to inject liquidity in the economy)
3) Credit Easing (purchase assests from troubled segments in order to relieve them and inject liquidity)

Question 5

Explain Discount Rate

Answer 5

Interest rate central banks have for banks and other finanicial instititutions

Question 6

Explain QE

Answer 6

CB purchases government securities and mortgage bonds and other financial secutiries to increase money supply

Question 7

Bagehats Dictum

Economy is in crisis what can the CB have as policies to help this, 3

Answer 7

1) Lend freely to illiquid but solvent institutions
2) Loan at high rate
3) Lend only to those with sound collateral