4.3 Role of Central Banks

Question 1

Examples of central banks?

Answer 1

1) Bank of England
2) European Central Bank
3) US Federal Reserve

Question 2

Main functions of central banks?

Answer 2

1) Use of monetary policy
2) Lender of last resort
3) Supervision of banking services
4) Handle government debt

Question 3

Aims of monetary policy in the UK?

Answer 3

• Monetary Policy Committee
• Aim of 2% inflation

Question 4

What is expansionary monetary policy?

Answer 4

1) Lower interest rates
2) Expand money supply
3) Depreciation

Question 5

What is contractionary monetary policy?

Answer 5

1) Higher interest rates
2) Tightening money supply
3) Appreciation

Question 6

How does the liquidity trap occur?

Answer 6

When the interest rate is extremely low and banks have run out of room to stimulate AD

Question 7

Ways to solve the liquidity trap?

Answer 7

1) Central bank uses negative interest rates
2) Switch to managed system
3) Use of QE

Question 8

How does Quantitative Easing work?

Answer 8

1) New electronic money
2) Used to buy assets from banks (e.g. govt bonds)
3) Increased liquidity
4) More loans available

3) Demand drives up price on assets
4) Lower yield on bonds
5) Lower interest rates

Question 9

In what ways does QE work?

Answer 9

1) Wealth Effect
2) Lending Effect

Question 10

Criticisms of QE?

Answer 10

• Keep alive zombie companies
• Larger property values
• Long-term low interest rates

Question 11

Main UK regulators?

Answer 11

1) Competition and Markets Authority
2) Financial Conduct Authority
3) Financial Policy Committee

Question 12

Main aims of financial regulation?

Answer 12

1) Protect against market failure
2) Encourage confidence
3) Allow central bank to perform its other roles

Question 13

Examples of regulation?

Answer 13

• Separate commercial banks from investment banks
• Govt protects £85,000 of savings
• Reserve requirement (Banks must hold % of savings) EV: depends on size of limit