Inflation and Unemployment

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  • Topic: Inflation, Economics, Monetary policy
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  • Published : May 29, 2012
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Workshop 10.1
1. Which of the following are wholesale and which are retail?

(a) Large-scale deposits made by firms at negotiated rates of interest. (b) Loans made by high street banks at published rates of interest. (c) Deposits in savings accounts in high street banks. (d) Deposits in savings accounts in building societies (e) Large-scale loans to industry syndicated through several banks.

wholesale retail retail retail wholesale

Workshop 10.1
A building society is a financial institution owned by its members. In the UK today, building societies actively compete with banks for most consumer banking services, especially mortgage lending and deposits.

the phrase "high street banks" has been widely used to refer to the retail banking sector in the United Kingdom.

Retail banking refers to banking in which banking institutions execute transactions directly with consumers, rather than corporations or other banks. Services offered include: savings and transactional accounts, mortgages, personal loans, debit cards, credit cards, and so forth.

Wholesale banking is the provision of services by banks to the likes of large corporate clients, mid-sized companies, real estate developers and investors, international trade finance businesses, institutional customers (such as pension funds and government entities/agencies), and services offered to other banks or other financial institutions. In essence, wholesale banking services usually involve high value transactions.

Workshop 10.1
2. Rank the following assets of a commercial banks in order of decreasing liquidity.

High liquidity Cash

Reserves with the Bank of England
Market loans (Short term page 308) Sale and repurchase agreements (repos) (Short term page 308) Government bonds (of from one to five years to maturity) (long-term page 309) Personal loans (=advances = long-term page 309) Mortgages (long-term . Least liquid. page 310) Low liquidity

Workshop 10.1
3. Consider the items in the following table, selected from a Bank A’s balance sheet LIABILITIES Sight deposits Time deposits Certificates of deposit in Bank A Repos £bn ASSETS £bn 2 1 77 20 100 Notes and coin 110 Reserve balances with B of E 40 Market loans 20 Bill of Exchange

Loans from other financial
institutions

30 Investments
Advances 300 Total

30
170 300

Total

See page 308-310 for long versus short term loans and liquidity (b) (c) (d) What is the cash ratio? What is the total of liquid assets What is the liquidity ratio? 3/300 = 1/100 or 0.01 or 1% £100bn 100/300 = 1/3 or 0.33 or 33%

Workshop 10.1
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: Banks receive

£m 100 80

Hold Lend Hold Lend Hold Lend Hold Lend Hold Lend

£m 20
80 16 64 12.8 51.2 10.24 40.96 8.19 32.77

Second round deposits rise by

Third round deposits rise by

64

Fourth round deposits rise by

51.2

Fifth round deposits rise by

40.96

Total deposits after five rounds

336.16

Workshop 10.1
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: (b) How much credit will have been created after five rounds? £336.16 – £100 = £236.16

(c)
(d)

To what level will total deposits eventually increase?

£500

Define the bank deposits multiplier The number of times greater the expansion of bank deposits is than the additional liquidity in banks that caused it: 1/L (the inverse of the liquidity ratio) What is the bank multiplier in this case? How is it related to the liquidity ratio? 5 The inverse. 1/5

(e) (f)

Workshop 10.1
6. Which of the following will cause the UK money supply to rise; which will cause it to fall; and which will cause no direct change?

A balance of payments surplus (under a fixed rate of exchange) The government finances the public-sector net...
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