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Monetary policy

Markets

Money

Europe
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Markets - Money markets

Quiz - Interest rates - keeping them interesting?

1. From the diagram below, select the area where you would expect the following to be true:
Changes in the Interest Rate
  • You would expect an excess supply of money.
    (Select one answer)

(a) * Top area
(b) * Middle area
(c) * Bottom area

       

  • People would be selling securities because they were short of liquidity.
    (Select one answer)

(a) * Top area
(b) * Middle area
(c) * Bottom area

       

  • The price of securities would be expected to fall.
    (Select one answer)

(a) * Top area
(b) * Middle area
(c) * Bottom area

       

  • You would expect interest rates to be stable.
    (Select one answer)

(a) * Top area
(b) * Middle area
(c) * Bottom area

       

2. What is meant by a 'repo'?
(Select one answer)

(a) * Repossession of a house by a bank or building society
(b) * Banks buying back gilt-edged securities from the Bank of England
(c) * Banks exchanging gilt-edged securities and other assets for liquidity on a temporary basis
(d) * The return of assets held by the Bank of England

       

3. In each of the cases below, has there been an increase or decrease in the amount of liquidity available in the markets?

  • Large tax payments are made by individuals as the Inland Revenue payments deadline approaches.
    (Select one answer)

(a) * Increase
(b) * Decrease

   

  • A bank agrees 'repos' of £700 million with the Bank of England.
    (Select one answer)

(a) * Increase
(b) * Decrease

   

  • A large gilt-edged security issue takes place.
    (Select one answer)

(a) * Increase
(b) * Decrease

   

  • £250 million worth of Treasury Bills mature and the holders are repaid.
    (Select one answer)

(a) * Increase
(b) * Decrease

   

4. What is the purpose of the Bank of England creating a daily shortage of liquidity?
(Select one answer)

(a) * To keep the banks on their toes
(b) * To ensure that the banks have to borrow each day at the interest rate set by the MPC
(c) * To help them judge how much money to issue each day
(d) * To help control the demand for money

       

5. Say a £10,000 gilt-edged security is issued with a fixed return of £1,000, in other words a market rate of interest of 10%. Calculate the value of the gilt if the interest rate changes to the values given in the table below. Fill your results in the second column.
(Type your answer)
6. If the following changes occur, what is the value of the 'daily shortage'?

  • There is a rise in note circulation of £100 million
  • Tax payments of £200 million are made to the Inland Revenue account at the Bank of England
  • £400 million of gilt 'repos' mature
  • There are government payments of benefits to individuals of £150 million

(Type the number of millions without a pound sign)

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