UNIVERSITY OF SUNDERLAND PROGRAMME

ASSESSMENT COVER SHEET / FEEDBACK FORM

Student Name & ID: SHONAZAROV Module Name/Code: APC312 Money, Banking
DAVRONBEK and Finance
B1905005

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Table of Contents
ASSESSMENT COVER SHEET / FEEDBACK FORM...............................................................1
.............................................................................................................................................................1
PART A.........................................................................................................................................................3
Question-1...............................................................................................................................................3
What are central banks doing to assist the Covid-19 epidemic recovery be more sustainable and
inclusive?.............................................................................................................................................3
Question-2...............................................................................................................................................3
What are the main distinctions between the financial crisis of 2008 and the Covid-19 pandemic?....3
Question-3...............................................................................................................................................4
Stock market performance is outpacing that of the economy, even as Covid 19 continues to spread,
so why is this happening?....................................................................................................................4
Part B...........................................................................................................................................................5
QUESTION 1.............................................................................................................................................5
"Printing Money" by the Federal Reserve...........................................................................................5
QUESTION 2.............................................................................................................................................6
QUESTION 3.............................................................................................................................................6
Interest Rates and Inflation.................................................................................................................6
Part C...........................................................................................................................................................7
The Keynesian theory..............................................................................................................................7
Theory of Monetarist..............................................................................................................................7
Reference....................................................................................................................................................8
PART A
Question-1
What are central banks doing to assist the Covid-19 epidemic recovery be more sustainable and
inclusive?
When the Covid-19 epidemic broke out, the world's fiscal and monetary authorities acted swiftly,
cooperatively, countercyclically, and massively. There are a number of ways in which central banks are
helping to ensure that the recovery is durable and inclusive. The first step is to raise awareness of the
dangers posed by climate change to global financial stability. To begin with, by demonstrating the need
for collective coordinated action, changes in supply and demand behavior, and other public measures,
such as proper carbon price. Third, by promoting policies that assure low finance costs for mitigation
and transition and giving advice that this will continue for an acceptable period of time. The fourth way
to enhance risk measurement, assessment, and mitigation is to provide analytical tools as public goods
(such as new risk models, climate stress testing, climate scenarios, disclosure of carbon exposures and
analysis of the redistributive impact of climate policies). It's also possible to speed up the shift towards a
net zero objective by working with the financial industry in developing new financial instruments.

For a long time, we assumed that natural resources were limitless and that using them would be cheap
or free. There were few constraints on the use of air, water, forests, and other forms of natural capital,
and even if there were, technological advancements would allow humanity to continue using these
resources indefinitely. Climate scientists' repeated warnings in the late 1980s led to the founding of the
Intergovernmental Panel on Climate Change (IPCC), which was supported by the United Nations
Environment Program and the World Meteorological Organization. scepticism about "limits to
development." Research by famous social scientists continues to examine the relationship between
human activity and global warming, particularly via the generation of greenhouse gases (GHG). 2 By the
late 1990s and early 2000s, mounting evidence of the negative impacts of GHGs on human society had
altered social norms.

Question-2

What are the main distinctions between the financial crisis of 2008 and the Covid-19 pandemic?
Constrained and measured variables are compared

The banking system's collapse in 2008 was the main impediment. As we approach 2020, the coronavirus
outbreak will be a major obstacle to overcome.

Not only do governments have to figure out how to restore local economies, but they also have to figure
out how to get the people to stop social distance. As a last resort, a medical limitation may be what
prevents us from fully recovering, in which case a vaccination is required to enable affected sectors
restore their pre-coronavirus functioning and employment levels. Consumers in the transportation and
food retail and tourism sectors will be particularly hard hit.

The Federal Reserve (the Fed) and the government spent $86 billion in total in 2008 to deal with the
financial crisis. While federal government stimulus spending is three times more, the Federal Reserve
has spent two times as much to far. After all the spending in 2010 and 2011, we were apprehensive
about the possible fallout, yet the predicted collapse never happened.

Although history never repeats itself, we may see trends that are very similar to those that emerged
following the previous financial catastrophe. It's conceivable that we'll be in a zero-rate environment for
years to come, just like last time. Pandemic relief in 2020 will aggravate the budget deficit and may lead
to an even bigger balance sheet for a longer length of time since the Fed never decreased its balance
sheet in the past. As a result, there might be two big repercussions.

Concerns about inflation and the stability of the financial system might arise.

Many sectors' supply curves and supply chains have been negatively impacted, which might lead to a
rise in inflation. Now, many firms are taking advantage of a lack of clients who have disposable cash, as
the country's savings rate rose beyond 33% in April due to the country's hunkering down.

The financial system's instability is likewise a source of constant worry. Because of low interest rates and
the vast size of the Fed's balance sheet, the financial system has been fine since February and has
continued to bleed into March. Consequently, in advance of a stock market shutdown, the Fed took
action to support the Treasury market.

Measures to restore lost income

Additional unemployment assistance and several lending schemes were also provided by the
government. Individuals and companies were able to regain almost as much revenue as they had lost, as
seen by the personal income report from April.

We don't wish to downplay the hardships faced by many families; although not everyone benefited from
the income replacement efforts, personal income climbed by 10.5% but consumer expenditure fell
considerably. The outcome was a record savings rate (or income replacement) during a recession, which
is unheard of. Because of the 2.5 million new jobs created in May, the May income data implies that we
may be able to hang on to those increases.

Of course, there are still many unanswered questions. Assuming the $600-a-week supplemental
unemployment benefits expire in July, what happens next? PPP loans expire, and what happens to its
borrowers? This is what occurs when state and municipal governments slash expenditure in order to
close budget gaps: Only time will tell, as it did in 2008, and every action will have repercussions.

Question-3
Stock market performance is outpacing that of the economy, even as Covid 19 continues to
spread, so why is this happening?
During the Covid 19 epidemic, the stock market went up while the actual economy went down. Is the
stock market rising because the real economy is so vulnerable? One thing has been plainly evident as
the crisis progressed: small businesses and low-wage service workers have been struck the hardest. In
contrast, in the stocks market, they aren't nearly as important. Even though there are alternative
explanations for today's high prices, they all have their own limitations.

However, the markets' assumption that low interest rates would last forever is not evident. Long-term
supply repercussions, particularly from deglobalization, may persist even if global demand improves.
Additionally, central banks have pushed billions of dollars into private bond markets, which is
unprecedented in the Federal Reserve's history. Monetary policy in the classic sense does not include
the Federal Reserve's purchases of private bonds. These policies bear more resemblance to an
emergency central bank working as a Treasury agent than they do to the actual programs themselves.
Part B
QUESTION 1

"Printing Money" by the Federal Reserve

In the aftermath of the Great Recession, the media often refers to the Federal Reserve as "creating
money." As a result of the Federal Reserve's contentious quantitative easing (QE) policy, the amount of
money in the economy is being bolstered (QE).

The Federal Reserve pumped money into the economy by purchasing trillions of dollars worth of
financial instruments, mostly U.S. government bonds, from financial institutions

Creating Money via the Process of Printing

The Treasury Department's Bureau of Engraving and Producing (BEP), which develops and produces all
paper money in the United States, is in charge of printing the money consumers take from ATMs and
banks. (All coins are made by the U.S. Mint.)

According to a Fed directive, each year's quantity of money that is issued by the BEP is set by the BEP.
The Fed then distributes the money to its 28 cash offices, which in turn distribute it to the country's
8,400 banks, savings and loan institutions, and credit unions through armored carrier and other means
of distribution. The Federal Reserve's Board of Governors requested 5.2 billion Federal Reserve notes
from the BEP for the 2020 fiscal year, which is worth $146.4 billion.

The Fed's QE Program Creates Money

"Thin air" money may certainly be created by the Federal Reserve. Specifically, it's done by typing on a
computer. QE, or open market operations, was an example of this in action. Essentially, it is when the
Federal Reserve purchases an asset from a financial institution and pays for it with money it has created.

Steve Meyer, a Fed Board of Governors senior adviser, explains how it's done in this video. "You may be
wondering how the Federal Reserve pays for the bonds and other assets it purchases." "he asserts,
according to her. "Paper money is not accepted by the Federal Reserve. An electronic fund is established
and deposited into the seller's account by the Federal Reserve, which in turn pays the seller's bank.

Why can't impoverished countries simply create more money and become richer?!

This seldom works when the whole nation seeks to grow wealthy by creating more money. Because
prices rise when everyone has more money. As a result, individuals are finding it more difficult to
acquire the same number of things for the same price.

Countries like Zimbabwe and Venezuela have experienced this when they increased the issuance of new
currency in an effort to spur economic growth.

"Hyperinflation" developed in these nations when the printing machines increased their output. This is
the time of year when costs skyrocket.
There was a 231,000,000% year-on-year increase in prices when Zimbabwe was stricken by
hyperinflation in 2008. One Zimbabwean dollar would have been worth 231 million Zimbabwean dollars
a year later if inflation had not occurred.

The value of all of this paper much exceeds the face value of the currencies it contains.

QUESTION 2

The phrase "modern monetary theory," or MMT for short, is just a new name for an old concept. In their
view, a state issuing fiat money does not have to rely on taxes or borrowing to pay its expenditures.
Printing money is all it takes to keep it afloat. Even if hyperinflation and economic collapse have
occurred multiple times in the past, current proponents of what would have been considered economic
heresy argue this time it is different and that inflation can be managed by utilizing the tax system to
govern individual consumption. Is it, however, a long-term answer for South Africa and a viable option?
There is a wealth of information and analysis provided by Sandy McGregor.

In response to the COVID-19 crisis, central banks in the United States, Europe, and Japan have
abandoned all sense of conventional financial caution in favor of MMT principles. During the three
months after the stock market collapse in March, the US Federal Reserve Board (the Fed) increased its
balance sheet from US$4 trillion to US$7 trillion. As a result, the federal government's budget deficit has
ballooned to an all-time high of US$3 trillion. This year, the balance sheets of the Federal Reserve, the
European Central Bank (ECB), and the Bank of Japan grew by $6.3 trillion. The arrival of MMT has been
nearly accidental. Its long-term unforeseen repercussions represent a serious threat to the global
economy's financial stability.

QUESTION 3

Interest Rates and Inflation

Inflation is strongly linked to interest rates, which may have an impact on the value of the currency.
Interrelationships between interest rates and inflation may be difficult to control, and countries try to
balance the two. As a result of low interest rates, the economy and the value of the dollar both increase
and the dollar's worth rises. Inflation may occur if demand outstrips supply, although this isn't always a
negative conclusion. Nevertheless, international investment is seldom attracted by low interest rates.
Foreign investment is attracted to countries with higher interest rates, which raises the value of the local
currency.

The value and exchange rate of a nation's currency is ultimately determined by the perceived worth of
retaining that money. The stability of a country's government and economy, as well as other economic
considerations, have a role in this view. The safety of owning cash assets denominated in a currency is
the most important concern for investors. In unstable countries, investors prefer to avoid the currency
and avoid holding large quantities of it for a long length of time or for a long period of time.

Why do bonds' values fall when inflation brings greater prices?

A certain bond's interest rate is a key factor in the solution. A bond's interest payments lose some of
their purchase power when prices rise. Assume that a $400-per-month bond payment is the norm for a
five-year term. Five years from now, $400 will be worth less. A bond's price lowers when investors fear
that the bond's yield will not keep up with the growing costs of inflation.
Part C

There are two schools of economic thought, one Keynesian and the other monetarist, each with its own
ideas on what propels the economy and how the government should intervene in downturns. Spending
in the Keynesian view is what drives economic growth or contraction, while monetarists believe that
money supply is more important.

Keynesian and monetarist economic theories have conflicting views on how to combat recessions and
economic growth. Keynesian economists believe that government expenditure is the most important
element affecting the economy, while monetarists believe that the total quantity of money in circulation
is the most important.

The Keynesian theory

John Maynard Keynes, a British economist of the 20th century, coined the term "Keynesian theory."
Economic growth or stagnation is often attributed to "aggregate demand," which simply refers to the
total amount of money people spend in the economy as a whole. People lose their jobs as a result of
decreased expenditure, and the opposite is true when spending increases.

Therefore, according to Keynesian theory, governments should attempt to maintain economic

equilibrium by increasing government expenditure in times of economic hardship and decreasing it in
times of prosperity. Government expenditure may be used to generate demand and bring people back
to work in times of economic distress, while reducing government spending in times of prosperity can
prevent inflation.

When it comes to public works projects like the New Deal or the American Recovery and Reinvestment
Act of 2009, the idea is typically connected with them.

Theory of Monetarist
Rather than focusing on overall expenditure, monetarists believe that the quantity of money is the
driving force behind the economy. Theory proponents claim that more money in circulation means that
more businesses are able to operate and that more money is spent, which in turn boosts the economy.
Milton Friedman, the late Nobel laureate economist and leading proponent of monetarist theory,
notoriously blamed the Federal Reserve, which regulates the United States' money supply, for the Great
Depression.

According to some monetarists, central banks should simply let the money supply to increase at the rate
of GDP, a measure of overall economic activity, without any intervention from the Fed or other central
banks.

Monetarists may also advocate for more direct action. In the late 1970s and early 1980s, the Federal
Reserve intentionally reduced the money supply and raised interest rates in an effort to control
inflation. Because of this downturn, which started in 2008, the Federal Reserve slashed interest rates to
near-zero levels while also purchasing bank securities and other assets as part of the Troubled Asset
Relief Program (TARP).
Reference
Silva, L., 2022. How are central banks helping to make the recovery from the Covid-19 pandemic more
sustainable and inclusive?. [online] Bis.org. Available at:
<https://www.bis.org/speeches/sp210416.htm> [Accessed 18 January 2022].

Ruiz Estrada, M., 2022. The Difference between The Worldwide Pandemic Economic Crisis (COVID-19) And
The Global Financial Crisis (Year 2008).

Bis.org. 2022. [online] Available at: <https://www.bis.org/speeches/sp210416.pdf> [Accessed 18

January 2022].

Claconnect.com. 2022. 2008 vs. 2020: A Financial Crisis Comparison. [online] Available at:
<https://www.claconnect.com/resources/articles/2020/2008-vs-2020-a-financial-crisis-comparison>
[Accessed 18 January 2022].

Moneyweek.com. 2022. [online] Available at:

<https://moneyweek.com/economy/us-economy/604070/us-federal-reserve-tapering-qe> [Accessed
18 January 2022].

The Balance. 2022. How Keynesian Economics Works. [online] Available at:

<https://www.thebalance.com/keynesian-economics-theory-definition-4159776> [Accessed 18
January 2022].

Corporate Finance Institute. 2022. Monetarist Theory. [online] Available at:

<https://corporatefinanceinstitute.com/resources/knowledge/economics/monetarist-theory/>
[Accessed 18 January 2022].

NEWS BBVA. 2022. From the Great Recession to the Great Pandemic: the differences between the 2008
and 2020 crises. [online] Available at: <https://www.bbva.com/en/from-the-great-recession-to-the-
great-pandemic-the-differences-between-the-2008-and-2020-crises/> [Accessed 18 January 2022].