Coming soon…Student Revision

Workshops
GRADE BOOSTER (Year 13)

1.Market Structures
2.Labour Markets
3.Financial Markets
4.Global Economy
5.Synoptic Thinking

FLYING START (Year 12)

1.Think of a Number
2.Market Failure and Government
Intervention
3.UK Economic Performance
4.Demand Side Policies
5.Supply Side Policies
From the tutor2u shop
Launching Today!

Model Essay booklets, complete

with examiner commentary and
essay structure advice.

Booklets include:

•International trade
•Advanced Macro
•Theory of the Firm
•Development Economics
•Financial Markets

…and many more!

Today’s Session Aims

• To identify student concerns over key concepts required for this part
of the syllabus

• To consider how this topic might be assessed

• To establish ways to help students avoid likely pitfalls

Financial Markets: Central Banks and Money

A quick exam-board poll

Teaching Global Economics

 Syllabus requirements
Topic AQA Pearson Edexcel OCR
Functions & characteristics Yes Yes (from Theme 1) Yes
of money
Defining money – narrow & Yes Implicit understanding of Yes
broad ‘money supply’
Types of banks (commercial/ Yes No Yes
investment)
Credit creation Yes (NOT credit creation No Yes
multiplier calculation)
Money markets Yes Yes – but broad overview Yes (incl. loanable funds and
liquidity preference)
Role and function of Central Yes Yes (4 roles given) Yes (incl. evaluation, plus
Banks primary/secondary
objectives)
Independent Central Banks Not explicitly Not explicitly Yes
and inflation targeting
Financial Markets: Central Banks and Money
 Money – key concepts and potential pitfalls
Get the right diagram!
NOT Forex or capital (shares etc)
Liquidity preference approach: Functions i.e. “what money does”:
generally assume inelastic money •Medium of Exchange
supply & understand different •Standard of Deferred Payments
reasons for demanding money •Unit of Account
(precaution, transactions, speculative) •Store of Value
Loanable funds:
Links savings & investment Characteristics i.e. “what money is
like”:
•Durable
Actually not a straightforward •Portable
concept… •Divisible
Spectrum of liquidity from narrow •Generally acceptable etc.
to broad (“M0” to “M4”)

SYNOPTIC LINKS: Fisher Formula;

globalisation;
Financial Markets: Central Banks and Money
monetarist/neoclassical diagrams
Money – classroom activity 1

In the chat window, type in any additional ‘characteristics’ that you think money
should have

Now imagine you are on a desert island somewhere warm in the Pacific…based on
these money characteristics, decide whether you think these lovely coconuts could
be regarded as money. Type ‘yes’ or ‘no’
Financial Markets: Central Banks and Money
Money – classroom activity 2

CASH IN HAND GOLD BAR

10yr GOV’T BOND SIGHT DEPOSIT

(GILT)
2yr CORPORATE
TREASURY BILL BOND

INFRASTRUCTURE A HOUSE

Where do these go on the spectrum?

Is there any debate?
Does it depend on the creditworthiness of
the gov’t, the stability of the economy etc?

Financial Markets: Central Banks and Money

 Money – classroom activity 2

2yr CORPORATE
BOND
GOLD BAR 10yr GOV’T BOND
TREASURY BILL (GILT)

SIGHT DEPOSIT A HOUSE INFRASTRUCTURE

CASH IN HAND

Financial Markets: Central Banks and Money

Money – possible assessment

Financial Markets: Central Banks and Money

Central Banks - role

Key issues
•Each country’s Central Bank operates differently with different targets and different policy instruments
•There may be significant differences between Central Banks in developed and developing countries
•Central Banks will operate differently depending on how independent of government they are

Financial Markets: Central Banks and Money

 Whose Bank Am I?

US Federal Reserve
Key Features
12 Federal Reserve Banks across the US European Central Bank
Chair: Janet Yellen Key Features
2% inflation target and maximum employment and 2- Central Bank for Euro Area countries
3% GDP annual growth rate <2% inflation target
Price stability essential for job creation & growth
President: Mario Draghi

Key point:
Functions vs objectives of banks:
http://www.bis.org/publ/othp04_2.pdf Financial Markets: Central Banks and Money
 Money creation – in theory and in practice

Bank Assets The way in which the modern banking system creates money by
expanding the money supply beyond the money created by the
Bank Liabilities Central Bank (creating broad money from narrow money)
Fractional Reserve The value of what the bank owes e.g. deposits
Banking

Reserve Multiplier = 1 / Reserve Ratio

requirement /
ratio The value of what a bank can ‘call in’ e.g. loans

Money Multiplier The % of depositors’ balances that banks must retain as cash

Synoptic Link: fractional reserve banking is effectively expansionary monetary policy

Financial Markets: Central Banks and Money
Money creation – in theory and in practice
Traditional approach (“in theory”): credit creation multiplier via savings deposits

Modern approach (“in practice”): credit creation via loans, secured on anything or
nothing!

Financial Markets: Central Banks and Money

Money creation – in practice
• Retail funding remains the main
source of funding for UK
commercial banks
• There is a significant range of
interest rates, even within the
same bank e.g. time vs sight
deposits – helps to manage
liquidity
• Over the last 40 years, commercial
banks have increased the money
supply by around 11.5% per year →
impact on house prices and other
assets?
Financial Markets: Central Banks and Money
• Bank deposits make up 97% of
money in the UK economy (just 3%
is created by the Bank of England)
• Post-Financial crisis, commercial
banks had ‘excess reserves’ and
this weakened the link between
narrow money and the creation of
broad money → “pushing on a
string”
• The reserve requirement in the UK
has fallen from over 20% in the late
1960s, to 5% by 1988, and is
around 3% today
 Possible assessment of Central Banks / credit
creation
• Really depends on the exam board – huge range of requirements and depth
• MCQs seem very likely
• Specific analysis and evaluation questions, based on the wording in the
specs
• Synoptic-style questions also seem very likely, with links with:
• Monetary and fiscal policy
• Free-market v gov’t intervention
• Impact of globalisation on the economy
• Impact of credit creation on, for example, investment and economic stability and
inequality
The best answers will draw on financial markets material where possible (even if the question could
have been answered without that material under the legacy specs)

Financial Markets: Central Banks and Money

More possible banana skins – commonly
confused terms / concepts

• Liquidity ratio and capital ratio

• Narrow money and broad money
• Bank assets and bank liabilities
• Bank Rate and any other interest rate!
• Debt finance and equity finance
• Functions of central banks and objectives of central banks

Financial Markets: Central Banks and Money

MCQs – from our Grade Booster
workshop

Financial Markets: Central Banks and Money

Possible approaches to teaching

Financial Markets: Central Banks and Money

Money creation – additional sources
• Tutor2u student webinar videos e.g.
https://www.tutor2u.net/economics/reference/revision-webinar-
commercial-banks-and-the-uk-economy
• Tutor2u Topic Videos and Study Notes, for example:
• What are commercial banks?
• How do commercial banks create credit?
• Limits on commercial bank lending
• Bank of England Quarterly Bulletin 2014 q1 “Money Creation in the
Modern Economy”
• www.positivemoney.org – and their YouTube channel with great
animations
Financial Markets: Central Banks and Money
Some ‘Big Questions’ to finish…

• To what extent is the Bank of England responsible for many of the

UK’s economic concerns e.g. savings that are ‘too low’, increased
income and wealth inequality etc?
• How has globalisation impacted on the activities of commercial
banks?
• What factors limit credit creation? (reserve requirements and other
regulations, willingness to borrow and confidence, interest rates etc)

Financial Markets: Central Banks and Money

Free model essay – a sample from our pack

Financial Markets: Central Banks and Money

Key learning points

Financial Markets: Central Banks and Money

Upcoming free webinars

• Teacher webinars:
• Financial Markets 2: financial institutions, Mon March 13th @ 12.30pm
• Financial Markets 3: financial regulation, Mon March 20th @ 12.30pm
• Preparing students for Edexcel Economics (A) Paper 3 – Thurs 9th March @ 1pm
• Preparing students for AQA Economics Paper 3 – Thurs 16th March 1pm
• Student webinars:
• Causes of financial crises, Wed March 8th 8-8.30pm
• Consequences of financial instability, Wed March 15th 8pm
• Policies to maintain financial stability, Wed March 22nd 8pm
• Market failures in financial markets, Wed March 29th 8pm

Financial Markets: Central Banks and Money

Any questions?

• ruth@tutor2u.net

Financial Markets: Central Banks and Money