IFE S10 Central Banking

Which is NOT a function central banks perform?

• Issuing money.

• Managing inflation.

• Setting taxes.

• Acting as a lender of last resort.

Which of the following tools does NOT count as monetary policy?

• 1. Closed Market Operations.

• 1. Open Market Operations.

• 1. Changing the discount rate.

• Changing reserve requirements.

Consider a demand and supply graph for central bank money (base money), why is the supply curve completely vertical?

• 1. Because commercial banks do not consider the interest rate.

• 1. Because it is electronic money and hence independent of interest rates.

• 1. Because it is not central bank money that influences the interest rate but the lending and borrowing by commercial banks.

• 1. Because the only one issuing money is the central bank and they are not directly motivated by interest rates, instead they pick an interest rate from the demand curve.

Consider a demand and supply graph for central bank money (base money), why is the demand curve downward sloped?

• Because the interest rate is the opportunity cost of holding liquid cash. If the interest rate is high, people will invest and earn the interest instead of keeping their savings in liquid cash.

• Because at a low interest rate banks are more likely give out loans and hence there is a higher demand for liquid cash.

• Because at a low interest rate central banks are more willing to sell money.

• Because a high demand for money will lower interest rates.

Expansionary monetary policy implies that…

• the supply of money increases, hence it shifts to the right.

• the demand for money increases, hence it shifts to the right.

• the demand and the supply for money increase and hence both shift to the right.

• the central bank is issuing bonds.

How does the central bank contract the money supply?

• It will issue bonds and sell them.

• It will sell bonds from past purchases.

• It will tax the government.

• It will tax banks.

What is the main difference between quantitative easing and conventional monetary policy?

• Quantitative easing uses electronic money.

• Quantitative easing leads to negative interest rates.

• Quantitative easing increases interest rates while simultaneously increasing the money supply.

• Quantitative easing does not work directly through the interest channel, because interests are already low, instead it tries to provide liquidity to banks.

What is the bank rate?

• The interest rate at which UK banks lend to each other.

• The interest rate at which UK banks borrow from the central bank.

• The interest rate at which the government borrows from the central bank.

• The interest rate UK banks receive from the central bank for their reserves.

What is the discount rate?

• It is rate at which US bank borrow money from each other.

• It is the rate at which US bank borrow money from the central bank.

• It is the rate at which the US government borrows money from the central bank.

• It is the rate which US banks receive on their reserves.

Which of the following is NOT a central bank?

• Bank of Canada.

• Bank of England.

• Bank of America.

• Bank of Japan.