Monetary system 2

Question 1

Money supply

Answer 1

The total quantity of money available in the economy

Question 2

Monetary policy

Answer 2

The actions undertaken by the central bank to control the money supply and credit conditions to stimulate or restrain economic activity.

Question 3

Components of money supply

Answer 3

Currency- Includes paper money and coins held by the public. Excludes currency held by central banks
Demand deposits- Funds held by individuals and businesses in checking accounts. These deposits are readily available for transaction

Question 4

Measures of the money supply

Answer 4

M0, M1, M2, M3 and M4

Question 5

M0 (Monetary Base)

Answer 5

The narrowest measure of money. Includes currency in circulation plus reserve balances held by commercial and central banks

Question 6

M1

Answer 6

M0 plus demand deposits and other checkable deposits. Represents narrow money readily available for transactions

Question 7

M2

Answer 7

M1 plus money market mutual fund balances and savings deposits. Represents a broader measure of money that includes less liquid assets

Question 8

Liquidity

Answer 8

Refers to the ease with which an asset can be converted into a currency without significant loss of value. M0, M1 and M2 are all liquid forms of money

Question 9

Central banks role

Answer 9

Monetary policy is typically conducted by a country’s central bank. They are responsible for managing money supply, setting interest rates and regulating the bank system e.g. the bank of england

Question 10

The bank of England

Answer 10

Founded in 1694 to act as the banker to the government. They produces banknotes for England and Wales, maintain price stability by keeping inflation close to target and stabilising the UK financial system.

Question 11

Federal reserve

Answer 11

Unlike the BoE, the fed has a dual mandate: maintaining price stability and promoting maximum sustainable employment