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Pearson Education Materials

Workshop 9: Money and Monetary Policy

1. Which of the following are wholesale and which are retail?
   
   1. Large-scale deposits made by firms at negotiated rates of interest. retail / wholesale
   2. Loans made by high street banks at published rates of interest. retail / wholesale
   3. Deposits in savings accounts in high street banks. retail / wholesale
   4. Deposits in savings accounts in building societies. retail / wholesale
   5. Large-scale loans to industry syndicated through several banks. retail / wholesale
   
   
2. Rank the following assets of a commercial bank in order of decreasing liquidity.
   1. Money at call and short notice
   2. Operational balances with the Bank of England
   3. Cash
   4. Personal loans
   5. Sale and repurchase agreements (repos)
   6. Mortgages
   7. Government bonds (of from one to five years to maturity)
   
   High liquidity
   
   

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   Low liquidity
   
   
3. Consider the items in the following table, selected from Bank A's balance sheet.
   
   

   A range of sterling assets and liabilities of Bank A	£m
   Notes and coins	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 Bank of England	1
   Sale and repurchase agreements with the Bank of England (repos)	20
   Market loans (to other financial institutions)	77

   
   
   1. Use these figures to compile a balance sheet for Bank A. Arrange the assets in descending order of liquidity.
      
      

      Liabilities	£m	Assets	£m
      Total liabilities		Total assets

      
      
   2. What is the cash ratio (counting operational balances as equivalent of cash)?
      
      

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   3. What is the total of liquid assets?
      
      

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   4. What is the liquidity ratio?
      
      

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4. Assuming that banks choose to maintain a liquidity ratio of 20% and assuming that new cash deposits of £100m are made in the banking system:
   
   1. Complete the following table which shows how credit is created.
      
      

      £m		£m
      Banks receive Second round deposits rise by Third round deposits rise by Fourth round deposits rise by Fifth round deposits rise by	100 ______ ______ ______ ______	Hold Lend Hold Lend Hold Lend Hold Lend Hold Lend	20 80 ______ ______ ______ ______ ______ ______ ______ ______
      Total deposits after five rounds

      
      
   2. How much credit will have been created after five rounds?
      
      

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   3. To what level will total deposits eventually increase?
      
      

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   4. Define the bank multiplier
      
      

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   5. What is the bank multiplier in this case?
      
      

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   6. How is it related to the liquidity ratio?
      
      

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5.  
   1. 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?
   2. 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.
      1. Initial effect
         
         

         Liabilities	£m	Assets	£m
         Initial new deposits		Initial additional liquid assets Initial additional credit
         Total initial new liabilities		Total initial new assets

      2. Eventual effect
         
         

         Liabilities	£m	Assets	£m
         Eventual new deposits		Eventual additional liquid assets Eventual additional credit
         Total eventual additional liabilities		Total eventual additional assets

   
   
6. 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. 1. The rise / fall in the rate of interest will lead to a rise / fall in investment and other forms of borrowing.
      2. 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.