Week 3 - Money and monetary policy

Question 1

How do we measure money?

Answer 1

Range from M0 to M4
Narrow money - M0 and M1
Broad money - M2, M3 and M4

Question 2

Narrow money

Answer 2

M0 and M1 - includes monetary base plus bank deposits which can be used for cash transactions

Question 3

Broad money

Answer 3

M2, M3, M4 - Narrow money plus deposits requiring notice and deposits from loans created by commercial banks

Question 4

Central bank

Answer 4

Power to print currency and influence the amount of money create by commercial banks

Question 5

Commercial banks

Answer 5

Under license from the central bank

Create money through loans (subject to liquidity constraints set by central bank)

Question 6

What can the central bank do?

Answer 6

Influence the money supply by changing the interest rate
Manipulate the money supply through the buying/ selling of government bonds
Change capital restrictions imposed on commercial banks through liquidity legislation - influence the broader money supply

Question 7

Quantity Theory of Money

Answer 7

Helps us connect the monetary and real side of the economy, normally represented in different markets

Links inflation rate to growth rate of the money supply

Question 8

Velocity

Answer 8

Speed at which the money stock circulates around the economy

Question 9

Velocity of money

Answer 9

Rate at which money circulates around the economy

Measured by the number of times the money stock circulates in any one year

Question 10

FInancial institutions

Answer 10

Central banks, commercial banks, non-bank financial institutions

Question 11

FInancial markets

Answer 11

Trading equities, bonds, other financial innovations

Question 12

Financial instruments

Answer 12

Cash instruments such as securities, loans etc…

Derivatives instruments in the form of contracts

Question 13

Stocks or equities

Answer 13

Rights to governance and shares in profits from publicly listed companies

Question 14

Bonds: T Bills or Gilts

Answer 14

Debts from governments and private organisations, often with a fixed income return for investors

Question 15

Government GILTS

Answer 15

Long term government debt (5 to 50 years)

Changes in prices of GILTS affect the long term interest rate

Question 16

Treasury Bills

Answer 16

Short term government debts (6 months to 2 years)

Changes in price of T-bills affect the short term interest rate

Question 17

Cash instrument

Answer 17

Cash deposit or loan that can be transferred as a security between financial entities

Question 18

Derivative instrument

Answer 18

A security derived from a ‘group’ of assets such as loans, stocks, bonds, commodities (e.g. Futures, Structured Finance and Options)

Question 19

Collateralised Debt Obligations (CDO)

Answer 19

Structured financial instrument that pools together different debt based assets that are then repackaged and sold on to investors in tranches

Form of risk splitting amongst risky assets

Question 20

Senior Tranches

Answer 20

Higher credit rating

Higher priority for repayments in even of default with lower return

Question 21

Junior Tranches

Answer 21

Lower credit rating

Lower priority for repayments in the event of default with higher return