Financial Markets and Monetary Policy

Question 1

Bank of England

Answer 1

The central bank in the UK economy, which is in control of monetary policy.

Question 2

Bond

Answer 2

Debt; represents money that must be paid back over a period of time

Question 2

Broad money

Answer 2

Money held in banks and building societies but that is not immediately accessible

Question 3

Central bank

Answer 3

Controls the banking system and manages the government’s monetary policies.

Question 4

Contractionary monetary policy

Answer 4

Monetary policy implemented to decrease aggregate demand.

Question 5

Default

Answer 5

The failure or inability to meet the legal minimum requirements of a loan

Question 5

Dividend

Answer 5

Portion of firms’ profits paid to shareholders

Question 6

Expansionary monetary policy

Answer 6

Monetary policy implemented to increase aggregate demand.

Question 6

Equation of exchange

Answer 6

The stock of money in an economy multiplied by the velocity of circulation equals the price level multiplied by real output (MV=PQ).

Question 7

Financial sector

Answer 7

Firms that provide financial services

Question 8

Hot money

Answer 8

Highly volatile money derived from investors storing money in different institutions, looking for the highest rate of return

Question 9

Interest

Answer 9

Money paid to a lender by a borrower

Question 10

Monetary Policy Committee (MPC)

Answer 10

Nine economists who meet monthly to set the Bank Rate as well as other monetary instruments.

Question 10

Monetary policy

Answer 10

Use of interest rates and other monetary instruments to achieve macroeconomic objectives.

Question 11

Money supply

Answer 11

Stock of money in the economy, comprised of cash and bank deposits.

Question 12

Narrow money

Answer 12

Physical money and more liquid assets.

Question 13

Rate of interest

Answer 13

The reward for saving and the cost of borrowing.

Question 13

Quantitative easing (QE)

Answer 13

By buying assets (generally government bonds) using newly created electronic money.

Question 14

Reserve currency

Answer 14

Foreign currency held in a country’s official reserves due to its value as a medium of exchange

Question 14

Repo rate

Answer 14

Rate at which the central bank can lend money to commercial banks.

Question 15

Reverse repo rate

Answer 15

Rate at which the central bank can borrow money from commercial banks

Question 16

Shadow banking system

Answer 16

Unregulated firms that provide credit

Question 17

Share

Answer 17

Equity; represents entitlement to a portion of a firm’s profits via dividends

Question 18

Systemic risk

Answer 18

When issues within one firm in the financial sector could bring about the collapse of the sector and/or the economy

Question 19

Transmission mechanism of monetary policy

Answer 19

The process by which alterations to the base rate affect determinants of aggregate demand