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Flashcards in Money Market Deck (11):


Medium of exchange (batter than barter )
Store of wealth
Unit of account

-Means of establishing value of future claims and payments

Inflations is destabilising as jt messes up these important functions


Definitions of money UK and eurozone

M0- cash in circulation + central bank reserves

Narrow money-
Broad money


Types of commercial bank

Retail banks- retail deposits and loans

Wholesale banks- wholesale Deposits and loans

Universal banks: conducting retail and wholesale banking

Other- e.g. Building societies

The regulatory environment of the financial sector


Commercial banks : key functions

Deposit taking and lending

Financial intermediation:

Expert advice
Expertise in channeling funds
Maturity transformation
Risk transformation
Transmission of funds


Banks balance sheet

Banks liabilities :

Sight deposits
Time deposits
CD,Repos, etc

Banks assets

Cash and reserve balances with BofE
Short term loans
Long term Loans


Liquidity in the money market

The discount and repo markets -
-Help banks smooth short run fluctuations of money demand

Repos- BOE buys gilts from banks at a fixed price/ date. Maturity life: usually 2 weeks

Also overnight repos

Rediscounting: private banks sell T bills back to BoE prior to maturity (which buys them at a discount price)

- The parallel money markets: bank to bank lending


The role of the central bank

Note issue
Banking functions
Management of governments borrowing programme
Provider of liquidity to banks
Operates monetary policy
Manages reserves


The supply of money

Banks reduce liquidity ratio
Non bank private sector chooses to hold less cash
Inflow of funds from abroad
A public sector deficit


Money demand

Motives for holding money : liquidity(L1)
-transactions and precautionary demand for Money(L1)

Speculative (assets) demand for money :
The rate of interest (L2)
Changes in price of securities and other assets
The exchange rates

Total demand for money -L1+L2


Equilibrium in money markets

Equilibrium rate of interest

- effects of changes in the money supply or demand on the rate of interest


Monetary transmission mechanisms

Interest rate transmission mechanism

Money supply ^ -> interest rate ¥ -> investment ^ saving ¥ -> AD ^