week 2 Flashcards
What is a liquid asset?
An asset that can be rapidly converted into cash while keeping its market value.
What are the three types of money in a modern economy?
- Bank deposits: IOUs from commercial banks to consumers
- Central bank reserves: IOUs from the central bank to commercial banks
- Currency: IOUs from the central bank to consumers
What percentage of the total money in the UK economy does fiat money represent?
About 3%
Who creates most of the money in the economy?
Commercial banks
Define broad money.
The total amount of money in circulation in the economy, including base money and other types created through credit creation by commercial banks.
What components make up broad money?
- Demand Deposits
- Time Deposits
- Other Liquid Assets
What is base money?
The total amount of money issued by the central bank, including currency in circulation and reserves of commercial banks.
List the components of base money.
- Currency in Circulation
- Reserves of Commercial Banks
What are deposit accounts in terms of balance sheets?
Assets of consumers and liabilities (IOUs) of commercial banks.
What is the role of reserves in a commercial bank?
Reserves are assets of the commercial bank and liabilities of the central bank.
What is a reserve requirement?
A regulation that requires commercial banks to maintain a level of reserves at the central bank corresponding to a specified proportion of their deposits.
True or False: The Bank of England has a reserve requirement.
False
What is the purpose of liquidity coverage ratio (LCR)?
To require banks to hold a large enough stock of highly liquid assets to meet their payment obligations in case of severe short-term stress.
What are high-quality liquid assets (HQLA)?
- Notes
- Coins
- Short-term deposits at a UK-authorized credit institution
- UK government bonds
- Short-term UK and some foreign money market funds
What does the money multiplier theory describe?
How the stock of broad money is determined and how the central bank can control the stock of money.
What is an example of a non-money liability for consumers?
Mortgages (secured loans) and unsecured loans.
What does QE stand for?
Quantitative Easing
How do commercial banks create money?
By creating deposits corresponding to any loan they make.
What does the identity relationship in the quantity theory of money express?
Mv = PY, where M is the amount of money, v is the velocity of money, P is the price level, and Y is the volume of goods and services.
What is M4?
A headline broad money measure that excludes deposits of intermediate other financial corporations.
What does the repayment of loans do to money supply?
Destroys money.
What is the significance of the central bank as the sole issuer of base money?
It allows the central bank to implement monetary policy.
What is the difference between secured and unsecured loans?
Secured loans are backed by collateral, while unsecured loans are not.
What is the effect of reserve requirements on commercial banks’ lending capabilities?
Claims that reserve requirements control lending are incorrect in modern economies.
