Monetary system 3

Question 1

Bank of England Monetary Policy Tools

Answer 1

Bank rate
Open market operations
Quantitative easing

Question 2

Bank rate

Answer 2

The bank rate is the interest rate the Bank of England charges commercial banks and other financial institutions for loans with a one-day maturity. It’s essentially the cost for banks to borrow money directly from the Bank of England.

Question 3

Open market operations

Answer 3

The purchase and sale of government bonds by the central bank. Used to influence the money supply and long term interest rates

Question 4

Quantitative easing

Answer 4

A form of open market operations where the central bank purchases longer term securities or other assets to inject liquidity into the market

Question 5

Monetary policy committee

Answer 5

The body within the BoE responsible for setting monetary policy. They meet every 6 weeks to assess economic conditions and announce policy decisions.

Question 6

Money supply sum

Answer 6

Sum of currency and demand deposits (M=C+D)

Question 7

Reserves

Answer 7

The portion of deposits that banks have not lent out

Question 8

Monetary base sum

Answer 8

The sum of currency and reserves (B=C+R)

Question 9

Fractional reserve banking system

Answer 9

Banks hold a fraction of their deposits as reserves and loan out the remainder. This process creates money in the economy

Question 10

Key ratios

Answer 10

Reserve deposit ratio- rr=R/D
Currency deposit ratio- cr=C/D