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EC1101E > Macro 4 > Flashcards

Macro 4 Flashcards

1
Q

What are the main function of money? Explain each function

A

Medium of Exchange
- often need to barter
- Double coincidence of wants, qty must satisfy both sides

Unit of account
- a measuring stick for valuing goods, services, assets and liabilities on a common basis.
- monetary value of items compared against one another(record-keeping, accounting, decision making)

Store of value
- keep money today to be spent
- money in the hand is an asset
- part of asset portfolio

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2
Q

What is double coincidence of wants?

A

requires that each party desires the other party’s goods on offer

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3
Q

commodities were used as money, with their _________ anchoring their ____________

A

intrinsic value
exchange value

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4
Q

Most of money in modern economies are entries in _________

A

digital ledgers

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5
Q

_______representing a ________ on commodities in storage are convenient to use for transactions

A

certificates
claim

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6
Q

What is fiat money ? What does its value depend on ?

Why?

A
  • money with no intrinsic value. Govt (fiat=govt decree) can create acceptability by decreeing a currency to be legal tender, i.e. recognized by law as valid for payments, and by mandating its use for paying taxes
  • ## depends on peoples’ willingness to accept it in payment
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7
Q

What is hyperinflation?

A

sustained inflation rate > 50% per month

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8
Q

What causes hyperinflation? What do governments do to prevent this?

A

With the advent of fiat money, governments can potentially finance budget deficits by “printing money. But undisciplined money creation can cause hyperinflation

Govt impose rules on themselves to avoid the temptation. Power to create money is delegated to a central Bank

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9
Q

What is m1? What does it include ?

A

Financial assets that can be used as medium of exchange. consist of currency in circulation and demand deposits

currency in circulation: excludes cash in bank vaults and ATMs

demand deposits: deposits that are used for making transaction

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10
Q

What is M2?

A

M1+ “very liquid assets” (include savings deposits, small time (fixed) deposits, negotiable certificates of deposit)

because of deep market for buyer and sellers

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11
Q

What is M3?

A

M2+ liquid assets (nclude large time deposits, term repos, term
Eurodollar deposits)

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12
Q

Which money aggregate has the highest liquidity?

A

M1

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13
Q

What is liquidity?

A

more quickly an asset can be sold for currency, with as little impact on its selling price , the more liquid the asset is

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14
Q

What are financial intermediaries? How do they earn a profit?

A

Middleman between savers and borrower(include banks)

charging a spread between the interest rate they pay to savers and interest rate they obtain from borrowers

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15
Q

Why are insurance financial intermediaries?

A

Interaction with insurance company is as customer sopaying premium to get insured

But they ue part of premium to pay off claims, and remainder used to buy financial assets to get borrower

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16
Q

List reasons why we should use financial intermediaries

A

Expertise at evaluating and monitoring borrowers : due to specialisation

Ability to finance large projects: Easy to finance Borrower deals with bank Bank pools funds from many savers

Risk to saver: Low risk Diversified across many borrowers

Liquidity for saver: Deposits are liquid

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17
Q

What are financial markets?

A

lending and borrowing of funds are conducted

Market for bank loans, and organized markets where securities (tradable financial instruments) are bought and sold

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18
Q

What type of market is a stock exchange?

A

secondary market

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19
Q

What are securities?

A

Financial instrunment standardiseed so can be traded

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20
Q

What is a bond?

A

tradable debt security representing a promise to repay borrowed funds

traded in the bond market

21
Q

What benefits do securities markets bring?

A
  • provide competition to financial intermediaries as an alternative means to save and borrow
  • Can diversify risk across many makrets
22
Q

What are assets, liabilities and equities?

A

asset: what entity own
liability: what the entity owes
equity: asset-liabilities

23
Q

Are balanace sheets a stock or flow variable?

A

stock

24
Q

What is balance sheet and its changes presented as? Where to place asset, liability and equities?

A

T-account

aassets on left, liability and equity on right

25
Q

What happens when you place equity on the right?

A

2 sides are equal

26
Q

What accounting does balance sheet uses?

A

double-entry

27
Q

What is the central bank(slide 35)?

A
  • bank for commercial banks
  • Commercial banks keep most of their reserves in the form of deposits with the central bank
  • main regulator of banks and other financial institutions (regulations cover reserves, bank capital etc)
28
Q

What are the central banks main functions?

A
  1. Ensure financial stability:
    - keep payments running smoothly
    - regulate financial system
    - coping with financial crises
  2. Conduct monetary policy for price stability and/or managing economic fluctuations
    - manage exchange rate
29
Q

How is the central bank involved when a person from one bank pays another to a person from another bank?

A

Go through central bank, as both hav reserve accoutns at mas

Spreadsheet within MAS

30
Q

What is the formula for reserve ratio? What is it for?

A

reserves / demand deposits

  • central banks impose reserve requirements in the form of MINIMUM REQUIRED RESERVE RATIO (RRR).
  • banks can hold excess reserves
  • necessary for curbing bank lending
31
Q

What happens when banks are short on reserves?

A

(1) attract deposits
(2) recall loans or sell other assets
(3) borrow reserves from other banks or from the Central Bank

32
Q

In a _____ society, money held only in the form of_______. This implies that ___________ are composed entirely of _____________

A

cashless
bank deposits
bank reserves
deposits at the central bank

33
Q

Central banks can create money out of nothing. T/F

A

True

34
Q

What is money multiplier? What is the fomrula?

A

amount of money created (or destroyed ) for each dollar of reserves injected (or withdrawn)

at most 1/RRR

35
Q

Why would the money multiplier be smaller than 1/RRR ?

A
  • banks hold excess reserves
  • people may hold part of their money as cash
36
Q

Which are the primary methods that banks could use to influence money creation?

A
  • Changing Required Reserve Ratio(RRR)
  • Open market operations
  • discount rate
  • interest rate paid on reserves
37
Q

Explain the factors that can infleunce money creation

A

Changing Required Reserve Ratio(RRR):
- reduce RRR, loans increase, deposits increase (BUT WILL NOT WORK WHEN BANKS HOLDING EXCESS RESERVES)

Open market operations:
- changes the qty of reserves by purchasing or selling govt securities. If commercial bank hold some bonds, central banks buy from them
- For open market purchase, reserves increase, loans and deposit increase. (opp for open market SALE!!!!)

discount rate:
- Banks that are short of reserves can take a discount loan from the Central Bank
- discount rate= interest rate on discount loan (interest rate must be higher than discount rate)
- when reduce discount rate, reserve increase, loan increase, deposit increase

interest rate paid on reserves
- some central banks pay interest on reserve
- changing the interest rate changes bank willingness to make loan
- When reduce interest on reserve, banks encouraged to make more loans, loans increase, deposit increase (WORKS EVEN WITH EXCESS RESERVE!!!!)

38
Q

Why are banks important?

A
  • They are integral to the payment system
  • In making loans, they create money
  • Bank failures can damage the functioning of the economy
39
Q

Why are banks inherenetly fragile?

A
  • highly leveraged
  • borrow short lend long
40
Q

What is leverage?

A
  • borrowed funds to buy assets
41
Q

What does it mean when bank is insolvent/

A

cannot pay off liabilities even if sell all assets

42
Q

What are and what causes bank run ?

A

Bank run: rush to withdraw deposit

  • depositers suspect bank is insolvent, will rush to withdraw deposit
  • A bank does not have the reserves to handle massive deposit withdrawals, and its loans are long term assets, and cannot be quickly recalled, thus have to shut down
43
Q

What is bank panic?

A

many banks experience runs and shut down

44
Q

What are some policies to prevent bank runs and bank panics?

A
  • Reserve Requirement
  • Capital Requirement
  • deposit insurance
  • Restricting bank activities, regular monitoring by central bank
    (BASEL 3 framework)
45
Q

What is mandatory deposit insurance?

A
  • provided by govt
  • banks pay insurance premium
  • if there is bank run, SDIC will pay on behalf of bank
  • remove sense of urgency to withdraw deposit
46
Q

To stop a banking panic, the ______ must act as a ____________

A

Central bank
lender of last resort

47
Q

Central bank and/or the Government may also need to __________________, effectively becoming _____________

A

inject funds to boost bank capital
owner of last resort

48
Q

What are included in bank reserves?

A

Cash in Vault, ATMs + Deposits at Central Bank

49
Q
A

EC1101E (13 decks)

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