UNIT 9
CENTRAL BANKING
Complete these sentences about Central Banks using the words in the box:
Central Banks, such as the Bank of England, the Federal Reserve Board in the US, and the
Bundesbank in Germany:
act control
fix function
implement influence
issue supervise
1. …Act……. as banks for the government and for other banks.
2. …Implement……. monetary policy – either the government’s, as in Britain, or their own, if
they are independent, as in Germany and the USA.
3. …Control……. the money supply, measured by different aggregates, such as M0, M1, M2,
M3, etc.
4. …Fix……. the minimum interest rate.
5. …Function……. as lender of last resort to commercial banks with liquidity problems.
6. …Issue……. coins and banknotes.
7. …Influence…….(floating) exchange rates by intervening in foreign exchange markets.
8. …Supervise……. the banking system.
THE MONEY SUPPLY
Exercise 1
Insert the following words in the paragraph:
bonds commercial monetarist
prices tight velocity
Following the (1) …monetarist……. argument that the average level of (2) …prices……. and
wages is determined by the amount of money in circulation, and its (3) …velocity……. of
circulation, many central banks now set money supply targets. By increasing or decreasing the
money supply, the central bank indirectly influences interest rates, demand, output, growth,
unemployment and prices. The central bank can reduce the reserves available to
(4) …commercial……. banks by charging the reserve requirements. This reduces the amount of
money that banks can create and makes money (5) …tight……. or scarce. Alternatively, the
central bank can engage in what are called open market operations, which involve selling short-
term government (6) …bonds……. (such as three-month Treasury bills) to the commercial
banks, or buying them back.
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Exercise 2
Now do the same with this paragraph:
credit inflation output unemployment
interest rates the exchange rate aggregate demand
When money is tight,
1. …Interest rates……. rise, because commercial banks have to borrow at a higher rate on the
inter-bank market.
2. …Credit……. falls, because people and businesses borrow less at higher rate.
3. …Aggregate demand……. falls, because people and businesses buy less, as they have less
money.
4. …Output……. falls too, because with less consumption, firms produce less.
5. …Unemployment……. rises, because companies are producing and selling less, and so
require less labor.
6. …Inflation……. falls, because there is less money in circulation.
7. …The exchange rate……. will probably rise, if there is the same demand but less money,
or if there is higher demand, as foreigners take advantage of the higher interest rates to
invest in the currency. Increasing the money supply, by making more reserves available,
has the opposite effects.
FORMS OF MONEY
Choose the correct alternative to complete each sentence:
1. Money in notes and coins is called
a. Cash b. Capital c. Reserves
2. The dollar, the mark and the yen are all
a. Currencies b. Funds c. Monies
3. Money borrowed from a bank is a
a. Deposit b. Income c. Loan
4. Borrowed money that has to be paid back constitutes a
a. Debt b. Fund c. Subsidy
5. All the money received by a person or a company is known as
a. Aid b. Income c. Wages
6. The money earned for a week’s manual work is called
a. Income b. Salary c.Wages
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7. The money paid for a month’s (professional) work is a
a. Loan b. Salary c. Wages
8. Money placed in banks and other savings institutions constitues
a. Capital b. Deposits c. Finance
9. Money paid by the government or a company to a retired person is a
a. Pension b. Rebate c. Subsidy
10. The money that will ultimately be used to pay pensions is kept in a
a. Budget b. Deposit c. Fund
11. The money needed to start a company is called
a. Aid b. Capital c. Debt
12. The money paid to lawyers, architects, private schools, etc. is called
a. Fees b. Instalments c. Wages
13. Regular part payments of debts are called
a. Deposits b. Loans c. Instalments
14. Part of a payment that is officially given back (for example, from taxes) is called a
a. Gift b. Instalment c. Rebate
15. Estimated expenditure and income is written in a
a. Budget b. Reserve c. Statement
16. A person’s money in a business is known as his or her
a. Deposit b. Fund c. Stake
17. Money given to producers to allow them to sell cheaply is called a
a. Loan b. Rebate c. Subsidy
18. Money given to developing countries by richer ones is known as
a. Aid b. Debt c. Subsidy
