Question 1

Answer: Money is used in final settlement of a debt and as a ready store of value. Several functions of money are associated with different empirical measures of its supply. Given that most modern economies are government regulated through set monetary policies, the supply of money is broken down into types of money based on how much of an effect monetary policy can have on each. In Australia for example the the Reserve Bank of Australia (RBA) defines the aggregate functions of money into the following categories: M1: currency bank + current deposits from the private non-bank sector; M3: M1 + all other bank deposits of the private non-bank sector; Broad Money: M3 + borrowings from the private sector by Non-Banking Financial Institutions, less the NBFI’s holdings of currency and bank deposits; Money Base: holdings of notes and coins by the private sector plus deposits of banks with the Reserve Bank of Australia (RBA) and other RBA liabilities to the private non-bank sector
The different types of money found in most reserve banks are described in the table below.
Type of money M0 MB M1 M2 M3 MZM
Notes and coins (currency) in circulation (outside Federal Reserve Banks, and the vaults of depository institutions) V V V V V V
Notes and coins (currency) in bank vaults V V
Federal Reserve Bank credit (minimum reserves and excess reserves) V traveller’s checks of non-bank issuers V V V V demand deposits V V V V other checkable deposits (OCDs), which consist primarily of negotiable order of withdrawal (NOW) accounts at depository institutions and credit union share draft accounts. V V V V savings deposits V V V time deposits less than $100,000 and money-market deposit accounts for individuals V V large time deposits, institutional money market funds, short-term repurchase and other larger liquid assets V all money market funds V

Question 2
Answer:

Question 3:
Answer: ‘The money supply includes cash, coins and balances held in checking and savings accounts. Economists analyze the money supply which typically by the country's government or central bank and develop policies revolving around it through controlling interest rates and increasing or decreasing the amount of money flowing in the economy.’ That is traditional definition of money supply.
'Money creation in the modern economy' in 2014 by McLeay published by The Bank of England made some efforts to use money supply to change spending and inflationary pressure in the economy and explained two misconceptions about money creation. Since we use money for buying goods and services, it is likely to contain defined information about the current level of nominal spending in the economy and also provide accessorial information about future movements in nominal spending, so money can be a useful indicator of future inflationary pressure. The two misconceptions about money creation, one is that banks act simply as intermediaries, lending out the deposits that savers place with them, and Another common misconception is that the central bank determines the quantity of loans and deposits in the economy by controlling the quantity of central bank money. In reality, in the modern economy, commercial banks are the creators of deposit money rather than lending out deposits, thus the first misconceptions is wrong. With regard to the second point, rather than controlling the quantity of reserves, central banks use interest rates to implement monetary policy that is setting the price of reserves.

Figure 1 shows how money created by making loans, While new broad money has been created on the consumer’s balance sheet. So it is bank’s liabilities and consumer’s asset. There are several ways except making loans and paying credit bills to create and destory deposits. Banks buying and selling government bonds and central bank asset purchases which known as quantitative easing (QE), also have similar implications for money creation.
In the modern economy, there are three important constraints that restrict the amount of money created. Firstly, Banks themselves face limits on how much they can lend. According to Basel 3 accord, which focus on safety more than efficiency, establish a set of improvements on capital requirements. Compared to Basel 2 accord, Minimum Ratio of common equity from 2% to 4.5%, capital conservation buffer add to 2.5%, Total capital requirements is up to 7%.

Additionally, leverage ratio is used under Basel 3, this is a non-risk-based leverage ratio and is calculated by dividing Tier 1 capital by the bank's average total consolidated assets which should excess of 3%. Those changes in Basel 3 accord already influence the money supply. Secondly, Money creation is constrained by the behaviour of the money holders (households and businesses). Finally, the fundamental constraint on money creation is monetary policy. Although, Basel 3 accord is not the dominant factor of constraining money supply, it also makes requirement on the capital of banks and limits the money they can create by making loans.

Question 4
Answer: This question is about the negative interest in Swiss. To answer this question, first, the lender & borrower analyst will be introduced. Then, a compared effect on fixed income securities and some macro economic knowledge will be used to explain what is the aim of this policy and what is the result.
The borrower in this negative interest relationship is obviously the Swiss government and most banks of Swiss. And the lender includes various groups such as German, private equity who want to invest in Europe or a franc real estate company. The effect of this relationship is that although the lender give borrower money to use, they also pay extra money to borrowers for thanks for them using it. Think about a simple debt relationship, a negative interest rate happened in the situation that a lender will make loss even he just keep the money on hand, and the borrower also doesn’t want this money because he can’t use the money to make profit. For example, a deep gambler who go to casino every day and loss $100 every day. One day he found this is not good but he can’t control himself so this gambler give his money to another persons and also pay him the ‘managing fee’ for thanks him helps gambler getting rid of the casino. Like this reason, most European investors in recent years feel they will suffer deeply loss if they doesn’t exchange their currency to CHF. And because of the depression in Europe, both companies and governments can’t make extra profit. This is the key force of negative interest policy.
Further, we know the equation that (nominal interest= real interest + inflation), in a traditional view, the expansion period of a country usually come with a positive inflation, for example: 3.5%=0.5%+3%. A real inflation can been seen as the capital retained income rate of the total social system. In other words, this rate make sure the country achieve a positive economy growth rate. The European Union, which is the biggest economic union on the earth, is face a regression economic period in recent years. This result a negative inflation, deflation (e.g CPI is -3%). Fisher effect tell us this deflation should be digested by a lower normal interest rate or the country may face some serious problems like the decrease in potential GDP (Jacob B&Matthew R). For this reason, to stable the economic growth rate, more and more European Union members issue negative interest bonds. Thus, to European investors the negative doesn’t means a actually loss, and this is the basic reasons that European investors still buy Swiss’s bonds.
Another reason is for the risk avoiding. since 2011, Swiss central bank publish a policy that pegging the CHF with EUR at least at 1.2 EUR in CHF (as figure 1 shows).

Figure 1

Source: Swiss central bank: current interest rate and exchange rate
Due to its stable economic growth, Swiss is regarded as the best hedge country by most European investors. When the EUR faced a downward trend, a lot investors would exchange their EUR to CHF to avoid devaluation. Thus, The CHF played a role as some kinds of insurance of EUR. From the figure 1, we see that EUR/CHF is 1.2, and after 15/1/2015, when Swiss Central Bank decide to cancel this pegging limit, the exchange rate quickly decrease to 1. This situation tell us how hot the CHF is in European Union. Huge amount of investors exchange their currency to CHF, which cause a big money demand of CHF. The monetary theory tell us:
With the amount of money supply increase, the interest will become negative at some level to face the money demand (as figure 2 shows).
And, this is why Swiss also take QE in recent years. (In fact, this is a reverse derivation,and figure 3 prove this relationship)

Figure3
Source: Swiss central bank: current interest rate and exchange rate

Because of the above reasons, there still are a lot European investors who hold their currency as EUR lend their money to Swiss government. The negative interest policy is basically made to face its currency demand and to stable the economy in depression period.
Question 5
Answer：The balance sheet graphs shows total assets and some extra notes about QE policy for all four central banks. The time horizon of FED starts from Jan.2007 to Sep.2015 divided in monthly. Future earlier data are worthless because the wave of economic life cycle from last regression to now started in 2008 (GFC). Other banks’ time horizon also includes the important PE policy period and I make it as long as possible.

Source: Board Governs of The Federal Reserve System 2015 Time horizon- Aug.2007 to Oct.2015
QE Period: QE1 (announced 11/25/08) = Fed buys $1.24tn in mortgage securities.
QE2 (announced 11/3/10) = Fed buys $600bn in Treasuries.
QE3 (announced 9/13/12) = Fed buys $40bn/month in mortgage securities (to infinity and beyond).
QE4 (announced 12/12/12) = Fed buys $45bn/month in Treasuries.

Source: BOJ Time series Data search 2015 Time horizon- Apr.1998 to Sep.2015
QE Period: QE1 (announced 19/03/01) = approximately US$300 billion by increased bank’s current account balance and purchase tripled treasury bonds
QE2 (announced 10/7/10) = Purchase almost 70 trillion Yen in assets in different period Buy bonds 80 trillion yen a year (announced at Oct.2014)

Source: Economic Research-BOE total asset Time horizon- May.2006 to Sep.2014
QE Period: QE1 (announced March 2009) =200 billion in asset( most are UK government securities)
QE2 (announced December 2010) =Extra 375 billion pounds in QE programme

Source: Economic Research-ECB total asset
Time horizon- Dec.1998 to Sep.2015
QE Period: QE1 (announced March 2015) = €60 billion per month of euro-area bonds from central governments (planned to last until September 2016).
Question6:
Answer: QE is amied at stimulating economic activity,such as increasing consumer spending(BBC NEWs 2015). In general,QE means increasing monetmry supply. There are 4main methods to increase money in the market, issuing currency directly,open market operation, lowering deposit-reserve ratio and lowering the price of money. All these policy may be used to make money easier to get, so that there will be more money in the market. More money in the market means companies raise money easier and cheaper, which makes them willing to invest and recruit more employees. Consumers are more willing to consume than put money in the bank, because of the low interest rate.Money in which country conducting QE will be cheaper, people from other countries may buy more products from that country. All these will boost the economy. However, inflation may occur. For example, in order to recover Japan’s economy, Abe Shinzo and his government implemented abenomics at the end of 2012(CFR background 2012). Firstly, Abe asked the Bank of japan toissue money directly,and a 22676billion US dollar government-investment plan was passed. At last, the depreciation of Japan yen. These polices help Janpan’s companies both at home and aboard.

Question 7:
Answer: To discuss pros and cons of Bitcoin, we have to know the feature of it. Bitcoin is a form of digital currency, created and held electronically.(coindesk 2015). As we know, bitcoin was first put forward in 2009 by Satoshi Nakamoto. Bitcoin is electronic money, it is produced and traded on the internet. And like gold, there is a top limit of bitcoin’s amount, so finiteness is one of its character. Bitcoin is issued by no one, it is produced by a certain algorithm. According to its characters, now we can analyze bitcoin’s advantages and disadvantages. Firstly as electronic money, bitcoin can be trade easily through the internet anywhere and anytime, it is good for investors. And bitcoin is safer than conventional currency, since it cannot be robed or stolen. However, electronic money is only accepted by a small group of people, most of the financial investors prefer real money. Secondly, bitcoin is not infinite, according to its algorithm, bitcoin will reach its maximum amount in 100 years. It is good news for investors, because they do not have to worry about inflations. Depreciation will not occur on bitcoin. While deflation is sure to happen, when the bitcoin increases slower than the economic growth, prices go up, investors need more bitcoin, but cannot get it somewhere.
Bitcoin is trade through certain internet platform, which protects investors’ personal information. It is harder for the government to secure its financial issues but we cannot say it’s good for investors, since most of the investors want to stay low. When you make more money, there always will be more eyes on you. However, the platform used to trade bitcoin is protected by no one, anyone who is good at programing can hack that platform, it is bad for investors.
Last but not least, bitcoin is issued by no one, the price of it is totally controlled by market, well market may be irrational sometimes, if some big company want to play the price of bitcoin in order to make money from it, small bitcoin investors may get hurt.

Reference list

Q1&Q2
Bank of England (2015), ‘Statistics’, Retrieved October 17,2015 www.bankofengland.co.uk/statistics/Pages/default.aspx
Economic Reseracch (2015), ‘ International Financial Statistics’, Retrieved October 18, 2015 https://research.stlouisefed.org/fred2/release?pageID=1*ob=pv&od=desc&t=&et=&rid=239 &addseries2=Sumbmit
Uni Studt Guide (2012), ‘Monetary Policy’, Retrieved October 17,2015 www.unistudyguides.com/wiki/Monetary_Policy
Q3
Investopedia (2003), ‘ Money Supply Definition’, Retrieved October 17,2015 http://www.investopedia.com/terms/m/moneysupply.asp.
Michael M, Amar R & Ryland T (2014), ‘Money creation in the modern economy’ Bank of England
Rajesh Goyal, (2010), ‘Basel III Accord - Basel 3 Norms’, Retrieved October 17,2015 http://www.allbankingsolutions.com/banking-tutor/basel-iii-accord-basel-3-norms.shtml
Wikipedia, ‘Basel III’, Retrieved October 17,2015 https://en.wikipedia.org/wiki/Basel_III
Wikipedia, ‘Money supply’, Retrieved October 17,2015 https://en.wikipedia.org/wiki/Money_supply
Q4&Q5
Bank of Japan (2015), ‘currency policy’ Retrieved October 17,2015 https://www.boj.or.jp/en/ Board Governs of The Federal Reserve System (2015), ‘bank statement’,Retrieved October 17,2015 http://www.federalreserve.gov/monetarypolicy/bst_recenttrends.htm Economic Research, ‘ECB total asset & BOE total asset’ Retrieved October 17,2015 https://research.stlouisfed.org/fred2/series/ECBASSETS Jacob B&Matthew R&Robert F (1994), ‘Industry Returns and the Fisher Effect’, The journal of American finance association, Vol.49, Issue 5.pp.1595–1615

Swiss central (2015), ‘current interest rate and exchange rate’, Retrieved October 17, 2015 http://www.snb.ch/en/iabout/stat/statpub/zidea/id/current_interest_exchange_rates#t3 Wikipedia, ‘QE policy’, Retrieved October 17,2015 https://en.wikipedia.org/wiki/Quantitative_easing Q6&Q7
BBC NEWS (2015), “What is Quantitative Easing”,Retrieved October 17,2015 http://www.bbc.com/news/business-15198789 CFR backgrounds (2012),‘abenomics and the japan’s economic’, Retrieved October 17,2015 http://www.cfr.org/japan/abenomics-japanese-economy/p30383 Coindesk,‘what is Bitcoin’, Retrieved October 17,2015
http://www.coindesk.com/information/what-is-bitcoin/