Reading...
Play button
Play button
Use LEFT and RIGHT arrow keys to navigate between flashcards;
Use UP and DOWN arrow keys to flip the card;
H to show hint;
A reads text to speech;
22 Cards in this Set
- Front
- Back
|
What are the different definitions of money?
|
1) Currency- Bills and Coins
2) Checkable deposits- Bank accounts 3) M1 is the sum of outstanding currency and checkable deposits 4) M2 is M1 + money markets, deposits (apartment), savings, ect. |
|
|
What are bonds?
|
-Cannot be used for transactions
-Pay interest (There are many types with different interest rate but we will assume there is one kind, with one interest rate) |
|
|
What is the interest rate?
|
1) The market price for money
2) The return on savings 3) The cost of borrowing |
|
|
What is a stock variable?
|
A variable measured as a quantity at a point and time.
Examples: Money Bonds Wealth |
|
|
What is a flow variable?
|
A variable measured as a quantity per unit time.
Examples: Income Interest Saving |
|
|
What are some assumptions we make in the Financial Markets?
|
-Money is either currency or M1
-The only assets are: Money and Bonds -People hold a constant fraction of their money in currency -One type of bond -Everyone faces the same interest rate -Md= $Y*L(i) |
|
|
Describe Individuals' Demand for money and its formula.
|
1) Want higher demand when the individual has more transactions
2) Want lower demand when the interest rate is higher Md=$Y*L(i) |
|
|
What is the supply of money?
|
Since we are only using currency, Ms is set by the central bank.
Ms=M |
|
|
What is the Equilibrium in the Financial Markets?
|
We know:
Ms=M Md=$Y*L(i) So: Equilibrium: M=$Y*L(i) |
|
|
Describe what happens in an alternative Financial Market?
(With the assumption that the Fed never changes the interest rate) |
1) Market is flooded with non-official currency
2) There is excess supply 3) Interest falls and demand increases 4) Supply falls because of demand increase 5) Interest rates increase and demand falls 6) Now back to starting equilibrium |
|
|
What are open market operations (OMO)?
|
The purchase or sale of government bonds by the central bank for the purpose of controlling money supply
|
|
|
What is a expansionary OMO?
|
This results in higher Money Supply (Ms) where the fed buys bonds and pays for them with new currency
|
|
|
What is a contractionary OMO?
|
This results in lower Money Supply (Ms) where the fed sells bonds and receives existing currency as payment
|
|
|
What is the Bond process?
|
1) Purchase: a bond today and some price
2) In one year you can receive the price you paid plus interest How to calculate bond interest rate: ($Vb - $Pb) / $Pb Vb= Value of bond Pb= Worth today |
|
|
What are shortcomings of Financial Markets model?
|
1) We do not include all real assets
2) We have a small definition of money. We say money is M1 but fail to include things like savings and money markets |
|
|
What are Financial Intermediaries?
|
Institutions that receive funds from people and use these funds to buy financial assets
|
|
|
What are bank reserves? Why hold them?
|
The money that bonds have received from the depositors but have not loaned out. Reserves must be held in currency.
Why? 1) To honor withdrawals 2) To honor checks 3) Reserve requirements |
|
|
What is the required reserve ratio?
|
Θ= reserves/deposits
|
|
|
What is the money demand formula?
|
Md= CUd +Dd
CUd= Currency "central bank money" Dd= Checkable deposits CUd=m C*Md Dd= (1-C)Md |
|
|
What is Demand for Central Bank Money.
|
Hd = CUd + Rd
Rd= Θ*Dd (Rd=Demand for reserves) 1) Hd = CUd + Rd 2) CMd+Θ(1-C)Md 3) [C +Θ(11-C)]Md 4) Hd = [C+Θ(1-C)] |
|
|
What is the Money Multiplier?
|
1/[C+Θ(1-C)] * H
Θ= RR Ratio |
|
|
What does a graph look like?
|
Y-axis= Interest rate (i)
X-axis= M or H H=Central Bank Money Supply is a straight vertical line |
