Primary Liabilities on a Central Bank's Balance Sheet
The liability side of a central bank's balance sheet is primarily composed of the two forms of base money: physical banknotes in circulation and the electronic reserves that commercial banks hold at the central bank.
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Introduction to Macroeconomics Course
Ch.6 The financial sector: Debt, money, and financial markets - The Economy 2.0 Macroeconomics @ CORE Econ
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Example of a Central Bank Balance Sheet: Bank of England (March 2021)
Primary Liabilities on a Central Bank's Balance Sheet
Figure 6.11: Bank of England Liabilities as a Percentage of GDP (1946–2023)
Match each economic scenario involving a change in a country's currency value with its most direct and immediate consequence on the domestic economy.
The currency of a small, open economy weakens by 15% against its major trading partners. Standard economic models for this country predict that this event should lead to a 3% increase in the general price level over the next year. However, one year later, the observed increase in the general price level is only 1%. Which of the following scenarios provides the most plausible explanation for this discrepancy?
Calculating the Impact of Currency Appreciation on Inflation
A country's central bank is debating the cause of a recent increase in the domestic inflation rate. The nation's currency has depreciated by 10% over the last quarter. Two policymakers offer competing assessments:
- Policymaker 1: "This 10% depreciation is the main driver of our inflation. The rising cost of everything we buy from abroad is directly pushing up our overall price level."
- Policymaker 2: "The depreciation has an effect, but it's likely a minor factor. Our economy is not heavily reliant on foreign products; imported goods represent a very small fraction of what the average household consumes."
Evaluate these two arguments. Which statement provides a more complete and contextually sound economic analysis, and why?
A central bank creates and issues an additional $50 billion in new physical currency to the public. Based on the fundamental accounting principle that its financial statement must remain balanced, what is the direct and necessary consequence of this action?
A central bank creates and issues an additional $50 billion in new physical currency to the public. Based on the fundamental accounting principle that its financial statement must remain balanced, what is the direct and necessary consequence of this action?
Analyzing a Central Bank's Open Market Operation
Analyzing a Central Bank's Open Market Operation
Analyzing a Shift in a Central Bank's Liabilities
Analyzing a Shift in a Central Bank's Liabilities
Analyzing a Central Bank Solvency Crisis
Analyzing a Central Bank Solvency Crisis
Evaluating a Central Bank Policy Proposal
Evaluating a Central Bank Policy Proposal
A central bank can expand its total liabilities, for instance by issuing more banknotes, without a corresponding increase in its total assets.
A central bank can expand its total liabilities, for instance by issuing more banknotes, without a corresponding increase in its total assets.
To maintain a balanced financial statement, a central bank must hold assets equal in value to its liabilities. Classify each of the following items as either an 'Asset' or a 'Liability' from the perspective of a central bank's balance sheet.
Analyzing Market Dynamics
For a central bank's balance sheet to remain in equilibrium, the creation of new base money, which is recorded as a ____, must be offset by an equivalent increase in the bank's assets.
A market for a specific type of rare vintage comic book is initially stable. A popular movie adaptation is announced, causing a sudden increase in the comic's price. Observers notice that as the price continues to climb, even more buyers enter the market, hoping to resell the comic for a profit later. This influx of new buyers drives the price up further. Which statement best analyzes the dynamic occurring in this market?
Convertibility between Bank Reserves and Currency
Primary Liabilities on a Central Bank's Balance Sheet
A large commercial bank anticipates a high demand for cash from its customers over a holiday weekend. To meet this demand, the bank arranges to withdraw a large volume of physical banknotes from its account at the nation's central bank. How does this transaction affect the two forms of money supplied by the central bank?
Match each form of money supplied by the central bank to the description of its characteristics and primary holders.
Analyzing Central Bank Actions
A technology firm's balance in its corporate checking account is considered part of the monetary base supplied by the central bank.
Distinguishing Forms of Base Money
The money supplied by a central bank is classified into two forms: physical currency (notes and coins) and ____, which are the electronic deposits commercial banks hold at the central bank.
The Role of Currency and Reserves in a Digital Economy
A commercial bank begins the day with all of its central bank-supplied money held as electronic deposits in its account at the central bank. Throughout the day, two events occur: the bank withdraws physical currency from its central bank account, and then a customer withdraws some of that physical currency from their account at the commercial bank. Arrange the following descriptions to reflect the correct sequence of how the two forms of central bank-supplied money are held.
A financial analyst observes a trend where commercial banks are increasingly depositing their excess physical banknotes with the central bank. Which statement best analyzes the immediate effect of this trend on the two forms of money supplied by the central bank?
Commercial Bank Asset Allocation
Learn After
Commercial Bank Reserves (Central Bank Deposits)
Banknotes as a Liability of the Central Bank
An economist is examining a simplified list of accounts from a nation's financial system to understand the composition of the central bank's obligations. Which of the following pairs of items represents the two main liabilities that would be found on the central bank's balance sheet?
Identifying Central Bank Liabilities
A central bank's balance sheet lists physical currency held by the public as a liability, but it lists the electronic deposits of commercial banks as an asset because the central bank holds these funds on behalf of the commercial banks.
The Nature of Central Bank Liabilities
Analyzing a Shift in Central Bank Liabilities
A citizen uses a $100 banknote, issued by the central bank, to repay a loan to a commercial bank. The commercial bank then deposits this banknote into its reserve account at the central bank. Arrange the following statements to correctly describe the transformation of the central bank's liability throughout this process.
Match each primary liability on a central bank's balance sheet with its correct description.
The two primary liabilities on a central bank's balance sheet, which together constitute the monetary base, are physical currency in circulation and the electronic ______ that commercial banks are required or choose to hold in their accounts at the central bank.
A financial commentator claims: "If every individual in an economy deposited all of their physical banknotes into their commercial bank accounts, the total liabilities of the central bank would significantly shrink, as the 'currency in circulation' liability would fall to zero." Which of the following best evaluates this claim?
Impact of Public Behavior on Central Bank Liabilities