Progress text (21 April) 10.15: 1st half – LH : 2nd half – LH 32 Units covered by the 1st progress test: The Business Cycle (causes, Keynesianism and monetarism, graph description - vocabulary) Trade (retail, wholesale, e-commerce, international trade, free trade & protectionism, the EU) Banking (types of banks, banking services, microfinance, central banking, monetary policy, crisis of credit) + language of meetings

Central banking

Central banking functions Listening: RB, p 61

1a Listening The functions of a central bank: 1) Implementing monetary policy 1a) setting interest rate ceilings and floors 1b) printing money or destroying it 1c) open-market operations 2) Exchange rate supervision 3) Commercial banking supervision 4) Acting as a lender of last resort Read the text carefully, underline words/phrases that seem important/relevant to the topic. Are you sure you understand them? Ask a colleague for help... Do task II

1a Listening I The functions of a central bank: 1) Implementing monetary policy 1a) setting interest rate ceilings and floors 1b) printing money or destroying it 1c) open-market operations 2) Exchange rate supervision 3) Commercial banking supervision 4) Act as a lender of last resort Read the text carefully, underline words/phrases that seem important/relevant to the topic. Are you sure you understand them? Ask a colleague for help... II: A–1b B–1a C–3 D–2 E–4 F–1c

Implementing monetary policy HW check RB, p 62 I – 2 Do you understand the words below? TIC-TAC-TOE: What is... C + I + G + (X-M) = ?

Implementing monetary policy HW check RB, p 62 I – 2 Do you understand the words below? TIC-TAC-TOE: What is... C + I + G + (X-M) = AD C = Consumers' e___________ on goods and services. I = Investment spending by companies on c______ goods. G = G_________ expenditures on publicly provided goods and services. X = E______ of goods and services. M = I_______ of goods and services.

Implementing monetary policy HW check RB, p 62 I – 2 Do you understand the words below? TIC-TAC-TOE: What is... C + I + G + (X-M) = AD (aggregate demand = “total spending”) C = Consumers' expenditures on goods and services. I = Investment spending by companies on capital goods. G = Government expenditures on publicly provided goods and services. X = Exports of goods and services. M = Imports of goods and services.

What is...?... the total stock of money circulating in an economy. The circulating money involves the currency, printed notes, money in the deposit accounts and in the form of other liquid assets. MONEY SUPPLY An increase in the supply of money typically ________ interest rates, which in turns generates _______ investment and puts more money in the hands of consumers, thereby stimulating c________. Businesses respond by ordering ______ raw materials and increasing p________. The increased business activity r______ the demand for labor. The opposite can occur if the money supply falls or when its growth rate declines.

What is...?... the total stock of money circulating in an economy. The circulating money involves the currency, printed notes, money in the deposit accounts and in the form of other liquid assets? MONEY SUPPLY An increase in the supply of money typically lowers interest rates, which in turns generates more investment and puts more money in the hands of consumers, thereby stimulating spending. Businesses respond by ordering more raw materials and increasing production. The increased business activity raises the demand for labor. The opposite can occur if the money supply falls or when its growth rate declines.

What is the rate charged by the central bank for lending to other banks? DISCOUNT RATE What is bank’s ability to fund loans? LENDING CAPACITY What is the amount of funds that banks must hold in reserve against deposits made by their customers? RESERVE REQUIREMENT

What is the opposite of borrow? LEND What is a synonym for loose monetary policy? EXPANSIONARY What is the use of government spending and taxation to influence the economy? FISCAL POLICY What is debt that is not supported by any assets of the borrower? UNSECURED DEBT

II Hand in the table? III Present expansionary or restrictive monetary policy. Suppy the opposite term to complete the text about restrictive monetary policy. If the economy is in recession / ___________, the central bank should stimulate / ______ it. This can be done be lowering / ________ the reserve requirement, dropping / ________ the discount rate, or by buying / ________ bonds on the open market.

II Hand in the table? III Present expansionary or restrictive monetary policy. If the economy is in recession / overheating, the central bank should stimulate / cool it. This can be done be lowering / raising the reserve requirement, dropping / increasing the discount rate, or by buying / selling bonds on the open market.

IV Monetary and fiscal policy Fiscal policy spending greaterreduceunemployment demand hiringexpansionary fiscal inflation wishes restrictive fiscal make Monetary policy rate borrow bank more less expansionary monetary policy opposite spend less restrictive monetary policy

V Up or down? ExpansionaryRestrictive UPMoney supplyDOWN Interest rateUP Public spendingDOWN TaxesUP DemandDOWN Bank savingsUP GrowthDOWN UnemploymentUP InflationDOWN How do the two types of fiscal and monetary policies change the following?

US monetary policy according to CBS students (2006) The Federal Reserve (Central bank of Ben Bernanke Chairman of the Federal Reserve Glenn Hubbard Dean of Columbia Business School

The functions of a central bank 1)Implementing monetary policy 2)Exchange rate supervision (after 1st ppt) 3) Commercial banking supervision 4) Acting as a lender of last resort

Pair up! Treasury Boris Lalovac Bank of England Ministar financija Chancellor Ministarstvo financija The Governor Hrvatska narodna banka George Osborne Guverner HNB _________ Boris Vujčić

Paired up! Treasury Ministarstvo financija Bank of England Hrvatska narodna banka Chancellor Ministar financija The Governor Guverner HNB George Osborne Boris Lalovac Mark Carney Boris Vujčić

Northern Rock Banking Crises, RB, p 59 Match up the words and definitions below 1 bank run2 shakeout3 the Treasury 4 credit squeeze5 the Chancellor6 solvent Read the introduction – underline unknown words Scan the rest of the text and match questions to corresponding paragraphs 1D 2G3F4B5E6A7C Read carefully and underline unknown words / parts you do not understand IV Match the following words from the text to corresponding explanations, p 60 (finish for HW) HW: V Draft notes/draw a flow chart for events described

Northern Rock, RB, p follow-up activity 1unsecured debt 2bailout 3on the cheap 4to stem 5to hamper 6covered bonds ato stop bto prevent, hinder cissued with a guarantee (an asset) d at a low cost edebt that is not supported by any assets of a borrower fproviding money to get sb. out of financial trouble

Northern Rock, RB, p follow-up activity 1eunsecured debt 2fbailout 3don the cheap 4ato stem 5bto hamper 6ccovered bonds ato stop bto prevent, hinder cissued with a guarantee (an asset) d at a low cost edebt that is not supported by any assets of a borrower fproviding money to get sb. out of financial trouble

7run on a bank 8come under pressure 9(borrow) over their heads 10mortgage lender gorganization that makes loans for buying property with the property as security ha sudden demand by many people imore than would be reasonable, intelligent jto feel pushed to act

7hrun on a bank 8jcome under pressure 9i(borrow) over their heads 10g mortgage lender gorganization that makes loans for buying property with the property as security ha sudden demand by many people imore than would be reasonable, intelligent jto feel pushed to act

Northern Rock Banking Crises, RB, p 59 Who is to blame for the Northern Rock crisis? Why did the Bank of England not act earlier? Why did the Tresury get involved? Are critics convinced by the Bank’s response? What does the Chancellor’s guarantee for Northern Rock cover? How long will the guarantee last? What about investors who lent money to Northern Rock? Who will not be repaid? a) or b) a) Investors who bought the bank’s covered bonds. b) Investors who made unsecured loans.

Northern Rock Banking Crises, RB, p 59 Who is to blame for the Northern Rock crisis? Why did the Bank of England not act earlier? Why did the Tresury get involved? Are critics convinced by the Bank’s response? What does the Chancellor’s guarantee for Northern Rock cover? How long will the guarantee last? What about investors who lent money to Northern Rock? Who will not be repaid? a) Investors who bought the bank’s covered bonds. Why? What are covered bonds?

Intro to crisis of credit HANDOUT: Helga’s bar (a humorous explanation of how the crisis of credit started – the crisis of 2008) Students who did not attend on Tuesday should read Helga’s bar and do the exercises. You can download the text from my web site for BE 2.

Crisis of credit Forget about Helga and “DRINKBONDS” for a moment. This is what really happened: CRISIS OF CREDIT VISUALISED

Vocabulary focus 1 subprime borrowersA failure to repay a loan 2 credit ratingB investment fund that combines safe & risky investments 3 default C clients who may not be able to repay their loans 4 hedge fund D assets you promise to give if you cannot repay a loan 5 securityE estimates of people’s ability to fulfill their financial commitments 6 forecloseF to take possession of one’s property because they failed to continue paying a loan

Vocabulary focus 1 subprime borrowers C clients who may not be able to repay their loans 2 credit rating E estimates of people’s credit standing ability to fulfill their credit worthiness financial commitments 3 default A failure to repay a loan 4 hedge fund B investment fund that combines safe & risky investments 5 security D assets you promise to give to the lender if you cannot repay a loan 6 foreclose F to take possession of one’s property because they failed to continue paying a loan

MK, p 75 – Reading: The subprime crisis and the credit crunch

INTRO: Subprime crisis...?... a financial crisis that arose... 1 Where? 2 When? 3 What happened? A numerous institutional lenders and hedge funds collapsed B the mortgage market C after a sharp increase in mortgage foreclosures (mainly subprime) - Write your own definition!

Subprime crisis is a financial crisis that arose in... the mortgage market after a sharp increase in.... mortgage foreclosures (mainly subprime) collapsed... numerous mortgage lenders and hedge funds.

The subprime crisis and the credit crunch credit crunch = credit squeeze = credit crisis: - ________ in the general availability of loans (or credit) or a sudden tightening of the conditions required to obtain a loan from the banks. increase reduction Causes: -often caused by a sustained period of ________ and inappropriate lending which results in losses for lending institutions and investors in debt when the loans turn sour and the full extent of bad debts becomes known.debtbad debts careless careful

The subprime crisis and the credit crunch credit crunch = credit squeeze = credit crisis: - ________ in the general availability of loans (or credit) or a sudden tightening of the conditions required to obtain a loan from the banks. increase reduction Causes: -often caused by a sustained period of ________ and inappropriate lending which results in losses for lending institutions and investors in debt when the loans turn sour and the full extent of bad debts becomes known.debtbad debts careless careful Investor in debt?Loan turns sour?

How did the subprime crisis lead to the credit crunch/crisis/squeeze? Read: MK, p 75 Put the sentences below in the right order → Vocabulary: 1B2C3E 4D 5A

Who is to blame? The sharp increase in foreclosures and the problems in the mortgage market were largely blamed on: lowbubble loose lenders – _______ lending practices – ______ interest rates –a housing _________ –excessive risk taking by ________ and investors.

Who is to blame? The sharp increase in foreclosures and the problems in the mortgage market were largely blamed on: –loose lending practices –low interest rates –a housing bubble –excessive risk taking by lenders and investors.

HW: Watch the Crisis of credit video and answer the questions (pause the video when necessary) Following the tech bubble and the events of September 11, the Federal Reserve stimulated a struggling economy …HOW?... by ________________________________________ WHAT WAS THE RESULT ON THE HOUSING MARKET? _____________________________________________ WHAT WAS THE CONSEQUENCE FOR BORROWERS? ______________________________________________ This left mortgage lenders with property that was worth … HOW MUCH? ______________________________________ WHAT HAPPENED TO SEVERAL LENDERS ______________________________________________ In the wake of the meltdown, …WHAT DID CENTRAL BANKS DO? Source: SUBPRIME MELTDOWN (