Workshop 9
Money and Monetary Policy
1.
Which of the following are wholesale and which are retail?
(a) Large-scale deposits made by firms at negotiated rates of interest. ................ retail / wholesale
(b) Loans made by high street banks at published rates of interest. ..................... retail / wholesale
(c) Deposits in savings accounts in high street banks. .......................................... retail / wholesale
(d) Deposits in savings accounts in building societies .......................................... retail / wholesale
(e) Large-scale loans to industry syndicated through several banks. ................... retail / wholesale
2.
Rank the following assets of a commercial banks in order of decreasing liquidity.
(a)
(b)
(c)
(d)
(e)
(f)
(g)
Money at call and short notice
Operational balances with the Bank of England
Cash
Personal loans
Sale and repurchase agreements (repos)
Mortgages
Government bonds (of from one to five years to maturity)
High liquidity
.........................................................
.........................................................
.........................................................
.........................................................
.........................................................
.........................................................
.........................................................
Low liquidity
Money and
Monetary Policy
Workshop
9
3. Consider the items in the following table, selected from a Bank A’s balance sheet.
A range of sterling assets and liabilities of Bank A
Notes and coin
£m
2
Sight deposits in Bank A
100
Time deposits in Bank A
110
Investments in the public sector
30
Certificates of deposit in Bank A
40
Advances to UK private sector
170
Bills of exchange
20
Loans from other financial institutions
30
Operational balances with the Banks of England
1
Sale and repurchase agreements with Bank of England (repos)
20
Market loans (to other financial institutions)
77
(a) Use these figures to compile a balance sheet of Bank A. Arrange the assets in descending order of
liquidity.
Liabilities
£m
Assets
Total liabilities
£m
Total assets
(b) What is the cash ratio (counting operational balances as equivalent of cash)? .................................
(c) What is the total of liquid assets ........................................................................................................
(d) What is the liquidity ratio? .................................................................................................................
2
Money and
Monetary Policy
Workshop
9
4.
Assuming that banks choose to maintain a liquidity ratio of 20 per cent and assuming that new
cash deposits of £100m are made in the banking system:
(a) Complete the following table which shows how credit is created.
£m
Banks receive
£m
100
Second round
deposits rise by
____
Third round
deposits rise by
____
Fourth round
deposits rise by
____
Fifth round
deposits rise by
____
Hold
20
Lend
80
Hold
___
Lend
___
Hold
___
Lend
___
Hold
___
Lend
___
Hold
___
Lend
___
Total deposits
after five rounds
(b) How much credit will have been created after five rounds? ........................................................
(c) To what level will total deposits eventually increase? .................................................................
(d) Define the bank multiplier ............................................................................................................
(e) What is the bank multiplier in this case? ......................................................................................
(f)
How is it related to the liquidity ratio? .........................................................................................
3
Money and
Monetary Policy
Workshop
9
5.
(a) If banks operate a 25 per cent liquidity ratio, by how much will credit expand if new deposits
of £100 million are made by the customers of banks.
..............................................................
(b) Show the combined balance sheet (of additional liabilities and assets) for all banks (i) at the
beginning, and (ii) at the end of this process.
(i) Initial effect
LIABILITIES
Initial new deposits
Total initial new liabilities
£m
ASSETS
£m
…… Initial additional liquid assets
……
Initial additional credit
……
…… Total initial new assets
……
.….
(ii) Eventual effect
LIABILITIES
Eventual new deposits
£m
ASSETS
…… Eventual additional liquid assets
……
Eventual additional credit
……
Total eventual additional liabilities …… Total eventual additional assets
6.
£m
……
.….
An increase in the money supply will affect the level of economic activity in the country through a
sequence of events. In each of the following, delete the wrong words.
1.
The rise in the money supply will lead to a rise / fall in the rate of interest.
2 (a) The rise / fall in the rate of interest will lead to a rise / fall in investment and other forms of
borrowing.
2.(b) The rise / fall in the rate of interest will lead to a rise / fall in the rate of exchange..
3.
The rise / fall in the exchange rate will lead to a rise / fall in exports and a rise / fall in
imports.
4.
The rise / fall in investment and the rise / fall in exports and rise / fall in imports will lead to
a multiplied rise / fall in national income and a possible rise / fall in prices.
4