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49 Cards in this Set

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Income
what you earn from working plus what you receive in interest and dividends
flow
expressed in units of time: weekly income, monthly income, yearly income, etc
Saving
the part of after-tax income that you do not spend. It is also a flow
Financial wealth (wealth)
value of all financial assets minus all financial liabilities
Investment
economists reserve for the purchase of new capital goods: machines, plants, buildings
NOT same as financial investment
Finanial investment
purchase of shares or other financial assets
money
use for transactions and pays no interest
bonds
pay a positive interest rate, (i) but they cannot be used for transactions
Level of Transaction
the portion of financial wealth, not in bonds, kept on hand to handle desired transactions
Interest rate on Bonds
the portion of financial wealth used to collect interest/wealth. unable to use for transacction
Money market mutual funds
the funds of many people pool together. the unds are then used to buy bonds. pay interest ratesslightly below bonds do to administrative cost
Demand for Money
-demand for checkable deposits and currency
-the sum of all the individual demands for money by the people in the economy.
-it depends on the overall level of transaction in the economy and on the interest rate
-level of transactions in a economy is proportional to nominal GDP
Money Supply
-supplied by the centeral bank
-equal to eh modey demanded
LM relation
"LM"= Liquidity Money
Open market Operation
a way the central banks changes the supply of money is by buying or selling bonds in the bond market. increase money supply by buying bonds by creating money. decrease- vise versa
Expansionary Open Market Operation
increase money supply by buying bonds by creating money.
Contractionary Open Market Operation
decrease money supply it sells bonds and it removes money from circulation
Treasury bills/t-bills
bonds issued by the government promising payment in a year or less
determining bond intrest rate
bond term-end payment minus bond price all over bond price. gives interest rate
Financial Intermediaries
institutions that receive funds from people and firms and use these funds to buy bonds or stocks or to make loans ot other people and firms
Reserves
1.inflow & outflow of cash is unequal need some on hand
2.transfering funds to other banks
3.federal reserve requirement its about 10%
Reserve Ratio
the ratio of bank reserves to bank chackable deposits is about 10% in US. other 90% used to make loans or buy bonds
Central Bank Money
liabilites of the central bank are the money it issues
federal deposit insurance
government insures each bank account up to $100,000, to help prevent bank runs
Bank Runs
fear that a a bank will close, so depositors withdraw money from their banks
Narrow Banking
restrict banks to holding liquid and safe government bonds. loans would have to be madewith other financial intermediaries.
$Y
Nominal GDP
L(i)
intrest function
M^d
money demand
M^d=$YL(i)
Demand for money equals nominal incom times a function of the interest rate. intrest rate having a negative effect on money demand
M^s
money supply
M^s=M^d
-for equalibrium the two must be equal
-money supply equals money supplied
i
intrest rate
i=[$(amount)-$P^b]/$P^b
intrest rate on bonds
$P^b
price of a bond today
central bank balance sheet
assets= Bonds
Liabilities=money(currency)
CU^d=cM^d
demand for currency equals currency on hand times money demanded
-used when decide how much money to hold in currency
CU^d
demand for currency
c
-called Proportion c: gives currency held by person as a ratio
D^d=(1-c)M^d
demand for checkable deposits equals checkable deposits times money demanded
-used to decide how much money to hold in chckable deposits
D^d
demand for checkable deposits
(1-c)
proportion of checkable deposites figured by subtracting the ratio of c (currency) from total whole (1)
R^d=θ(1-c)M^d
demand for reserves by banks equals the reserve ratio of checkable deposites by money demanded
R^d
Demand for reserves by banks
θ
Reserve ratio: the amount the reserve bank holds per dollar of chackable deposits
R=θD
demand for reserves equals ther reserve ratio times the dollar anout of checkable deposits
D
dollar amount of checkable deposits
H^d
demand for central bank money
H^d=CU^d + R^d
demand for central bank money equals the sum of the demand for currency and the demand for reserves.