Week 5 Flashcards
What is Narrow money M0?
This is CB money: notes, coins and reserves of banks held at the CB. It is the most liquid form of money.
What is Broad money M2?
This is CB money and also commercial bank money.
The choice of how much money households and firms want to hold depends on…
…on their level of income and the interest rate:
- As their income increases, households will want to carry out more transactions, so will hold more money (deposits).
- A higher interest rate will make buying bonds more attractive and will reduce the proportion of income households and firms wish to hold in deposits.
A liquidity crisis:
Answers:
1. can easily become a solvency crisis
2. occurs when banks do not have strong fundamentals
3. occurs when everyone wants to hold risky assets
4. all of the above
can easily become a solvency crisis
An investment boom:
Answers:
1. shifts the IS to the left
2. shifts the PC to the right
3. does not affect any of the curves in our model
4. is totally irrational
none of the above
The statement from the book that central banks and banks create money means:
Answers:
1. that both banks and CB can print cash
2. that both contribute to the size of money supply in circulation
3. that both are government institutions
4. none of the above
that both contribute to the size of money supply in circulation
Which one of the below policies is an “unorthodox policy”?
Answers:
1. changing policy rate
2. changing the reserve requirement
3. open market operation
4. quantitative easing
quantitative easing
Money demand refers to the money of:
Answers:
1. households
2. firms
3. both households and firms
4. none, just investors
both households and firms
Claim: A bond is a claim on future cash flows
TRUE
Asymmetries of information:
Answers:
1. are easy to solve and hence to do not contribute to the financial system as we model it
2. are a main reason why the financial system is formulated as it is
3. they do not exist in the real world, except very rarely
4. none of the above
are a main reason why the financial system is formualted as it is
The lender of last resort
Answers:
1. is the prime minister
2. is biggest bank in the nation
3. is a fund made of banks
4. none of the above
none of the above
Money demand is affected by the interest rate
Answers:
1. positively
2. negatively
3. it is not affected by interest rate
negatively
When market interest rate raises, the price of exisiting bonds:
Answers:
1. drops
2. raises
3. is not affected, the bonds are already issued
drops
What is the banking mark - up?
The gap between the desired lending rate rs set by the banks and the policy rate rp set by the CB.
The demand for money depends … on output and … on the nominal interest rate
positively
negatively
How is lending rate mark up related to:
-riskiness of the loan?
-risk tolerance?
-bank equity?
Positively
Negatively
Negatively
Claim: Money supply is created only by Central Bank not commercial banks
False:
Money supply is created by both Central Bank and commercial banks
Money demand is a function of …
…output and the interest rate
Money demand … with output and … with interest rate
Increases with output
Decreases with interest rate
Structural factors that swift the MD/P (money demand) curve are…
-Confidence
-Innovations in payment tech
-Introduction on financial instruments
Money demand will … with loss of confidence.
increase
Mark up will … with a merger of 2 banks.
increase.
Less completion ->monopoly -> increase markup
Claim: Shifts in money demand simply shift money supply and they have no influence on the real economy, so no need to focus on them
True
If loans are viewed as less risky this will … the mark up. That means we move … the IS curve.
decrease
down
If the bank equity falls this will …. the ability to bear risk. Hence the markup will … and we move … the is curve.
decrease
increase
up
If markup increases, y output …
drops
In a financial crisis the relationship between … breaks down.
What does that mean?
between money market rate (𝑟𝑃) and lending rate (𝑟)
This means that key transmission mechanism of MP broke down.
QE shows commitment to …, helping to anchor … and help prevent …
inflation target πT
inflation expectations πE
a deflation trap
What are the possible dangers of QE?
- CB independence & credibility ↓: Future inflation-targeting becomes harder.
- Inflation expectations ↑ : QE might lead to higher future inflation, but higher 𝜋𝐸 was
necessary to prevent a deflation trap. - Financial cycle: Promotes asset bubbles.
- Excess reserves by banks can ↑ loans → inflationary risk.
- QE Exit: In theory, opposite effect to QE, i.e. downward pressure on π , raise long term yields.
If the degree of competition among the banking sector … the mark-up …
decreases,
increases
Mark-up (μB ) … with risk and
… with risk tolerance and bank equity.
increases.
decreases.
If the banks equity … the mark-up …
decreases.
increase
