Section 3: Money and Banking - Part 1: The Money Forms

"If you owe your bank a hundred pounds, you have a problem.

   If you owe it a million pounds, it has a problem!"

  JOHN MAYNARD KEYNES

A: Would you read back the last paragraph of my speech please, Victoria?

B: "Insider trading is, by its nature, not a matter which the general. Public is, Frankly, able to comprehend, and  I firmly believe that..."

     "When it comes to the complex question of deciding which individuals have breached the code of conduct, and trying these people, it is imperative that the city should be allowed to police itself..."

A: Hold on...

B: ah.

A: That sound read "please itself", my dear. 

3.1 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 word is called

     a. income                          b. salary                                c. wages

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 constitutes

     a. capital                            b. deposits                            c. finance

9.  Money paid by the goverment 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 of 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

Remember that subvention is not an English word

ANSWERS:

1.a   2.a    3.c    4.a    5.b    6.c   7.b   8.b    9.a   10.c   11.b   12.a   13.c   14.c   15.a   16.c   17.c   18.a

3.2 Borrowing and Lending

Choose the correct alternative to complete each sentence:

1.  If you possess something, you can say that you...............it
     a. owe                              b. own                              c.owner

2.  If you have to reimburse or repay someone, you ..............money.
     a. owe                              b. own                              c. yeild
3.  To let someone else have the use of your money for a certain period of time, after which it must be paid
     back, is to.....................
     a. borrow                         b. lend                               c. credit
4.  To take money that has to be repaid is, on the contrary, to...................
     a. borrow                         b. lend                               c. steal
5.  An amount of money lent is a.........................
     a. debit                             b. debt                              c. loan
6.  A person who has borrowed money is a..................
     a. creditor                         b. debtor                           c. owner
7.  Another word for a lender is a/an.......................
     a. creditor                         b. debtor                           c. owner
8.  The income received by someone who lends money is called.........................
     a. dividends                       b. interest                          c. interests
9.  The borrower has to pay back the loan itself, also known as the....................
     a. principal                         b. principle                        c. premium
10.The amount of money a lender receives for a loan or an investment, expressed as a percentage, is known
     as its return or.......................
     a. credit                             b. income                          c. yield
11.The following famous quotation are about credit and borrowing and lending. Can you complete them:
      a. In business, one way to obtain.................is to create the impression one already has it.
      b. Neither a..............nor a...............be.
      c. An acquantance is someone we know well enough to...........from, but not well enough to............to.
      d. A..................card ia an anaesthetic which simply delays the pain.

ANSWERS:
1.b       2.a       3.b       4.a        5.c        6.b       7.a       8.b      9.b       10c
11. a. money
      b. borrower .....  lender
      c. borrow.......lend
      d. credit     

3.4 The Money Supply
3.4.1 PARAGRAPH:
     Following the monetarist argument that the average level of prices and wages is determined by the amount of money in circulation, and its velocity of circulation, many central bank 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 commercial banks by changing the reserve requirements. This reduces the amount of money that banks can create and makes money tight or scare. Alternatively, the central bank can engage in what are called open market operations, which involve selling short-term government bond (such as tree-month Treasure bills) to the commercial banks, or buying them back.

3.4.2 When money is tight, 
1.  Interest rates rise, because commercial bank have to borrow at a higher rate on the inter-bank market.
2.  Credits falls, because people and businesses borrow less at higher rates.
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 labour.
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.

3.9 Interest Rates
Choose words to complete each sentence. In some cases there is more than one possibility. 
1.    The Bank of England fixes a minimum interest rate, called the discount rate, at which it makes secured loans to........................
         a. big companies               b. private individuals             c. commercial banks             d. new businesses
2.    British commercial banks lend to blue-chip borrowers (big, secure companies) at the.................. The American equivalent is the prime rate.
         a. base rate                       b. basic rate                        c. discount rate                     d. market rate
3.      All other borrowers pay more, depending on the lender's estimation of their present and future solvency, also known as their creditworthiness or...............or.................
         a. credit                            b. creditors                          c. credit standing                  d. credit rating
4.   Borrowers can usually get a................interest rate if the loan is guaranteed by securities or other collateral.
        a. higher                             b. long-term                        c. lower                                d. riskier
5.    Banks makes their profits from the difference between the interest rate charged to borrowers and that paid to depositors, also known as a..................or....................
        a. margin                            b. mistake                           c. range                                d. spread
6.   Long-term interest rates are generally higher than short-term ones, except when the central bank temporarily reduces the money supply i.e. makes money.....................or........................
         a. loose                             b. scare                               c. tight                                  d. uncommon
7.     These days many loans are made with.....................or variable interest rates that change according to the supply and demand for money.
         a. drowning                       b. floating                             c. sinking                             d. swimming 
 8.     Borrowers and lenders can sometimes arrange limits beyond which rates cannot move. The upper limit is called a...................or a........................

         a. cap                               b. ceiling                               c. roof                                 d. summit
9.     The lower limit on a variable rate loan is known a........................
        a. bottom                           b. carpet                               c. floor                                 d. maturity
10.   A........................is an arrangement that fixes both the upper and lower limits.
        a. collar                             b. tie                                     c. shirt                                  d. suit
11. Central banks cannot determine the minimum lending rate for so-called Eurocurrencies-currencies held.......................
        a.  outside their country of origin                                     b. in Europe
12.   Banks are able to offer better rates to borrowers of Eurocurrencies because there are no.................... imposed by the central bank.
        a. discount rates                b. maturities                 c. money supplies                  d. reserve requirements

ANSWERS:
1.c     2.a     3.c & d     4.c     5.a & d     6.b & c     7.b     8.a & b     9.c     10.a     11.a     12.d

"Panic buying, I'm afraid - Cedric heard there was going to be a shortage."