The Monetary System Flashcards
(78 cards)
1
Q
What does the capitalist systems require
A
A medium of exchange
2
Q
What is money
A
A set of assets in an economy that people use to buy g/s from other people
3
Q
What did most people rely on before the development of capitalist societies
A
Barter
4
Q
What does a barter system
A
A double coincidence of wants- when two parties each have a g/s that the other wants an can thus enter into exchange
5
Q
What are the 3 functions of money
A
- Store of value- An item that people can use to transfer purchasing power from present to future
- Unit of account- Measure to post prices
- Medium of exchange- An item buyers give to seller for g/s
6
Q
What is wealth
A
-Total of all stores of money
- Money and non-monetary assets
7
Q
What is liquidity
A
- Ease at with which an asset can be converted into the medium of exchange
8
Q
What are the two kinds of money
A
- Commodity money
- Fiat money
9
Q
What is commodity money
A
Money that takes the form of a commodity with intrinsic value
10
Q
What is fiat money
A
Money without intrinsic value that is used as money because of a government decree
11
Q
What are most currencies today
A
Fiat
12
Q
What is key for economies to use fiat money
A
Expectations and social conventions
13
Q
What is the money stock
A
The quantity of money circulating in the economy
14
Q
What is currency
A
Paper notes and metal coins
15
Q
What is the function of a debit card
A
To transfer money in demand deposits
16
Q
What is the function of credit cards
A
- A method of deferring payment
- A loan from the bank who pays the bill
17
Q
What is money usually measured in terms of
A
Liquidity
18
Q
What is M1
A
Currency in circulation and overnight deposits
19
Q
What is M2
A
M1 plus deposits not immediately available such as with a maturity of up to 2 years in EU
20
Q
What is M3
A
M2 plus less-liquid assets such as deposits with longer maturity
21
Q
How is money measure from M1 to M3
A
From narrowest to broadest definition
22
Q
In the UK what were the two measures of money stock historically
A
M0 (discontinued) and M4
23
Q
What are the 3 types of money in the UK economy
A
- Notes and coins 3%
- Reserves 18%
- Bank deposits 79%
24
Q
What has become more popular than cash
A
Debit cards
25
Potential reasons for increased demand for cash
- A useful budgeting tool
- Demand for cash overseas
- Cash may be used in shadow economy
- In case of emergency
26
What is the Central bank designed to do
Regulate the quantity of money in the economy
27
What is the money supply
The quantity of money available in the economy
28
How can central banks aid macroeconomic stability (Function 1)
They can modify the amount of money to maintain stable growth and avoid major swings in economic activity
29
How can central banks aid financial system stability (Function 2)
By being a lender of last resort
30
What is monetary policy
Actions taken by the central bank to affect the money supply
31
What does lender of last resort mean
Where central banks step in to provide short term loans when Banks run short of liquidity needed to meet their obligations
32
Why do banks have liquidity issues
- Due to maturity mismatch
- Due to the fact customers can withdraw at any time
33
When did the UK government grant independence in setting interest rates to the Bank of England
1997
34
Who meets monthly and announces the interest rate
The Monetary Policy Committee
35
Since 2012, what other responsibilites does the Bank of England have
- Microprudential policy
- Identifying system risks to the UK financial system
- Protection of investors, market supervision and regulation and conduct banks and financial services
36
How many countries is the Eurpoean Central Bank the main Bank for
19
37
What is the primary objective of the ECB
- Promote price stability and design and implement monetary policy
38
What are the 3 main tools that Central Banks influence the money supply
- Open market operations
- Repo/ refinancing/ discount rate
- Reserve requirements
39
What are open market operations
The purchase and sale of non-monetary assets from and to the banking system by the central bank
40
Through OPOs what can the central bank do
Increase and decrease the money supply
41
Give an example of how the central bank can increase the money supply
- Creating currency by buying bonds to increase money supply
- Absorbing currency by selling bonds to decrease money supply
42
What can Quantitative easing acheive
A substantial increase in the money supply
43
Explain the process of QE
- Broad money is created by buying assets such as bonds from private sector institutions
- This increases demand for bonds and thus increases bond prices
- Now, debtors cna repurchase their bonds and issue new ones with lower coupon rates which incentives higher Econ. activity
44
What is Repo Rate
Where central banks agree to buy assets from banks and agree to sell them back at a later day
45
When do banks enter into repurchase agreements usually
When they have a shortage of liquidity due to a general shortage in the money market
46
What is the Repo Rate
The price difference between how much the bank sells the asset to the central bank and how much it agrees to repurchase it in the future
47
How can the central bank impact the money supply through reserve requirements
It can require banks to hold involuntary reserves to constrain the money supply
48
How do banks earn and pay interest
- Earn interest from loans and pay interest on liabilities
49
What is spread
The difference between the average interest banks earn in assets and the average interest rate paid on liability
50
What is the spread a primary determinant of
The profit banks made
51
How did banks finance lending to other people
Through borrowing and deposits
52
What maturity to most banks assets have and why
-Long term
- They tend to generate greater returns
53
What happens if too many of a bank's liabilities are short term
They become unstable and my not be able to meet borrowers demanding their money
54
What does an increase in the interest rate imply for banks in terms of lending and how does this affect the money supply
- That banks need to increase their lending rates in order to maintain spread
- Less money is created
55
Why can't banks lower their lending rates to attract lots of new consumers
- This lowers reserves which imply higher risks
- Thus there is a trade off between security and profitability
56
What is credit risk
The risk a bank faces in defaults of loans
57
What is macroprudential policy
Policies designed to limit systemic risk by improving prudential standards of operations that enhance stability and reduce risk
58
Systemic risk
The risk of failure across the whole of the financial sector
59
What are the two main risks banks face
- Not being able to meet demand for withdrawal (Liquidity risk)
- That borrowers may not pay loans back
60
What do macroprudential regulations make banks do
Follow requirements in structuring balance sheets to protect them from the risks they face
61
What is the goal of macroprudential regulation of banks
- Avoid using taxpayers money to bail them out
62
Example of macroprudential regulation
Specific asset to capital ratios
63
If the CPI is 103 and the base year is 100 what is the price increase %
3
64
What is inflation
The increase in the price level
65
What does the demand for money reflect about people
How much wealth people want to hold in liquid form
66
How does interest rates effect demand for money
Higher IRs means More people will choose to hold interest bearing assets thus DforM increases
67
How do prices effect demand for money
- Higher prices means higher demand for money as more money is needed to buy good and services
68
What is assumed to happen to prices in the long run
The reach a level where demand =supply
69
What happens to the value of the pound when the central bank increases money supply
The price level will increase, making the pound less valuable
70
What is the quantity theory of money
A theory that asserts that the quantity of money determines the price level and the growth rate in q of money determines inflation rate
71
What does the QTM say about the impact of the money supply on production, employment, real wages etc
- QTM suggests they don't have an impact
72
What does economist David Hume argue about the division of economic variables
-Two variables
- Nominal Variables : Variables measured in nominal units
- Real variables: variables measured in physical units
73
How to calculate the relative price of good A relative to B
Price of A/ Price of B
74
How to calculate real wages
Nominal wage/ Price
75
What does Hume's theory of monetary neutrality mean
Changes in the money supply do not affect real variables
76
What is the fisher equation
MV= PY where M is money supply, p is prices, V is velocity of money and Y is national income
77
Fisher effect Equation
78
What is inflation tax
Revenue the government raised by creating money
