wk7- monetary policy

• Nature of money 

  Is a financial asset, at any point the total amount of money is given by the money stock, widely used and accepted as means of payment for economic transactions as such many things can be used as money but today we use fiat money (notes and coins with no intrinsic value)

  Without money we would have the problem of “double coincidence of wants” which characterises a barter economy and its notoriously inefficient
• The ideal token to serve as money needs to be- durable, divisible, easily recognisable and of stable value
• Functions of money 

  Medium of exchange-

  Unit of account- common unit in which prices of different goods and services can be quotes and in which accounts can be expressed 

  Store of value- can be used to make purchases in the future, purchasing power should not be undermined by inflation 

  Means of evaluation- allows vale of goods services and asset to be compared

  Standard of deferred payment- unit if account over time which enables borrowing and lending to take place 
• Budget balance- government revenue minus government expenditure, slope is determined by marginal tax + marginal lost benefit rate 
• Debt sustainability rule- the required primary surplus - to - GDP ratio necessary to maintain the current value of the debt - to - GDP ratio
• Cash Ratio = (Cash + Reserves) / Total Assets
• Monetary base or stock of high powered money (H)- quantity of notes and coins in private circulation + quantity held by banking system 
• Money multiplier- change in the broad money stock for £1 change in monetary base
• Uk money supply

  Official UK measure of money is M4, consists of currency held by public plus bank deposits and building society deposit, does not include foreign currency held by banks and building societies or bank deposits of uk gov
• Sight deposits can be transferred to one person or another by writing a cheque or using a card so are money, time deposits can be easily switched into sight deposits so are money too 
• Cheques are not money instead an instruction to your bank, debit cards are not money it is like an instant cheque, credit cards are not money they enable the holder to obtain a loan quickly but must be repaid with money, apple pay is not money but a means of transferring it 
• Monetary policy 

  The government both sets the policy and decides necessary measures to achieve it, setting interest rates with centralbank simply influencing money markets. Or the government set policy targets for the central bank giving them independence in deciding interest rates. Or central bank given total independence 
• Banks liquidity ratio- central bank could impose statutory minimum reserve ratio on banks, prevents banks choosing to reduce cash or liquidity ratio and creating more credit also reduces the bank deposits multiplier
• Public sector deficits- to prevent government borrowing increasing money supply it needs to be financed by selling bonds however will have to offer higher interest rates
• Retail banking- business by high street banks, operate bank accounts for individuals and businesses attracting deposits and granting loans at published rates of interest 
• Wholesale banking- involves receiving large deposits from and making large loans to companies or other banks and financial institutions, in the past these were independent known as investment banks
• Sight deposits- any deposits that can be withdrawn on demand by the depositor without penalty e.g current accounts
• Time deposits- require notice of withdrawal, normally higher interest rates e.g deposit and savings accounts
• Certificates of deposit- issued by banks to customers for large deposits of a fixed term can be sold by one customer to another
• Sales and repurchase agreements (repos)- if banks have temporary shortage of funds they can sell some of their financial assets to other banks or central bank
• The money market is the market in short-term deposits and loans, it consists of the discount and repo markets and the parallel money markets

  Through repos the bank of england can provide liquidity to the banks at the rate of interest chosen by the monetary policy committee 

  Parallel money markets consist of various markets in short-term finance between various financial institutions 
• Treasury bills are financial assets with less than one year until maturity, they are sold at a discount to face value and the holder of bills will benefit purely from capital appreciation
• The price of existing bonds traded in the secondary market also vary negatively in price with the long-term rates of interest, a rise in long term interest rates lowers the price of all outstanding bonds 

  The longer a bond's term to maturity the greater the change in its price will be for a given change in long-term interest rates 
• The realised (‘ex-post’) real rate of interest (r) received on savings or paid on borrowing is the nominal (actual) interest rate (i) less the rate of inflation (π). However for future borrowed it is future rare of inflation that is relevant in decision making
• The less elastic the liquidity preference curve (L)- cause a bigger change in the rate of interest 

  The more interest-elastic the investment curve (I)- cause a bigger change in investment 

  The lower the marginal propensity to withdraw (mpw), the flatter the withdrawals function- cause a bigger multiplied change in national income aggregate demand 
• A rise is money supply causes money supply to exceed money demand assuming expected inflation is fixed, real interest rates fall this causes investment to rise, causes a multiplied rise in national income