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The monetary system Flashcards

1
Q

Define medium of exchange

A

An item that buyers give to sellers when they want to purchase goods and services. It is anything that is readily acceptable as payment

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2
Q

Define unit of account

A

The yardstick people use to post prices and record debts

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3
Q

Define store of value

A

An item that people can use to transfer purchasing power from the present to the future

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4
Q

Define liquidity

A

The ease with which an asset can be exchanged into the economy’s medium of exchange

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5
Q

Define commodity money

A

This is a form of commodity with intrinsic value such as gold or cigarettes

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6
Q

Define fiat money

A

This does not have intrinsic value

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7
Q

Give 3 examples of fiat money

A

Coins, currency, current account deposits

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8
Q

Why is fiat money used?

A

Because of government decree

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9
Q

Define currency

A

The paper bills and coins in the hands of the public

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10
Q

Define demand deposits

A

Balances in bank accounts that depositors can access on demand by writing a cheque or using a debit card

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11
Q

Define central bank

A

An institution designed to oversee the banking system and regulate the quantity of money in the economy

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12
Q

When is a central bank required?

A

Whenever an economy relies on fiat money

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13
Q

Define money supply

A

The quantity of money available in the economy

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14
Q

What happens when too much money is printed?

A

Prices tend to rise

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15
Q

Why is the regulation of money supply a crucially important task?

A

Because if too much money is printed, prices will rise

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16
Q

Define monetary policy

A

The set of actions taken by the central bank in order to affect the money supply

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17
Q

What is the European Central Bank?

A

This is the overall central bank of the 19 countries comprising the European Monetary Union

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18
Q

Why did the ECB come into being?

A

11 countries wanted to use the same currency and be part of the European Monetary Union

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19
Q

What is the main aim of the ECB?

A

Promote price stability throughout the euro area

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20
Q

What is an important feature of the ECB and the Eurosystem?

A

Independence

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21
Q

What is the Bank of England?

A

The central bank of the UK

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22
Q

What is the primary duty of the Bank of England?

A

To deliver price stability

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23
Q

What is different about the Bank of England compared to the ECB?

A

The Bank of England does not have the freedom to define for itself what is meant by price stability, this is done by the UK government

24
Q

What is the Federal Reserve (Fed)?

A

The central bank of the USA

25
Who runs the Fed?
A Board of Governors, which has 7 members
26
Who appoints the 7 members of the Fed?
The US president
27
What two things can banks influence?
The quantity of demand deposits in the economy and the money supply
28
Define reserves
Deposits that banks have received but have not loaned out
29
What happens in a fractional-reserve banking system?
Banks hold a fraction of the money deposited as reserves and lend out the rest
30
Define reserve ratio?
This is the fraction of the deposits that banks hold as reserves
31
What happens to the money supply when a bank makes a loan from its reserves?
The money supply increases
32
What is the money supply affected by?
The amount deposited in the banks and the amount that banks loan
33
What are deposits into a bank recorded as?
Both assets and liabilities
34
What becomes an asset to a bank?
Loans
35
What does a T account show?
A banks deposits, loans and reserves
36
What can you work out from a T account?
The reserve ratio
37
How can you work out the reserve ratio from a T account?
Divide reserves by the total assets
38
What happens to the money that one bank loans?
The money is deposited into another bank which creates more deposits and reserves that are lent out
39
Define money mulitplier
The amount of money the banking system generates with each unit of reserves
40
How can you work out the money supply from the T accounts of multiple banks?
Add up each banks total assets
41
What are 3 main tools that a central bank has?
Open-market operations Changing the market reserve requirement Changing the refinancing rate
42
How does a central bank conduct open-market operations?
It does this buy buying government bonds from, or sells government bonds to the public
43
What happens when the central bank buys government bonds?
The money supply increases
44
What happens when the central bank sells government bonds?
The money supply decreases
45
What is the refinancing rate?
This is the interest rate the ECB lends on a short-term basis to the euro area banking sector
46
What happens to the money supply if the refinancing rate decreases?
The money supply increases
47
What happens to the money supply if the refinancing rate increases?
The money supply decreases
48
What is the refinancing rate called in the USA?
The discount rate
49
What is the refinancing rate called in the UK?
The repo rate
50
What are reserve requirements?
These are regulations on the minimum amount of reserves that banks must hold against deposits
51
What does increasing the reserve requirement do to the money supply?
It decreases the money supply
52
What does decreasing the reserve requirement do to the money supply?
It increases the money supply
53
How often are reserve requirements changed?
Very rarely
54
Which bank no longer sets reserve requirements?
The Bank of England
55
What are two problems for central banks because of fractional-reserve banking?
The central bank does not control the amount of money that households choose to hold as deposits in banks The central bank does not control the amount of money bankers choose to lend
56
What does securitization do?
It takes loans off the balance sheet so that the banks does not have to set aside reserves to cover these loans, increasing the bank's scope for increasing lending
57
Why did banks stop lending causing the 2008 credit crunch?
Mortgages were failing

ECO1017 (16 decks)

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