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Flashcards in Money Market Deck (11):
1

Money

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

2

Definitions of money UK and eurozone

M0- cash in circulation + central bank reserves









Narrow money-
Broad money

3

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

4

Commercial banks : key functions

Deposit taking and lending

Financial intermediation:

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

5

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

6

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


7

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

8

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

9

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

10

Equilibrium in money markets

Equilibrium rate of interest

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

11

Monetary transmission mechanisms

Interest rate transmission mechanism


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