(4) Financial markets

Question 1

money used as

Answer 1

medium of exchange, store of value, unit of account

Question 2

why people hold money

Answer 2

transactions motive, speculative motive, precautionary motive, opportunity cost of holding money

Question 3

two types of assets

Answer 3

money, bonds

Question 4

does money pay interest rate

Answer 4

pays no interest, but used for transactions

Question 5

do bonds pay interest rate

Answer 5

positive interest rate paid, but can’t be used for transactions

Question 6

holding of money depends on

Answer 6

level of transactions, interest rate on bonds

Question 7

bonds held indirectly by

Answer 7

money market funds

Question 8

semantic trap

Answer 8

money, income, wealth

Question 9

(financial) wealth =

Answer 9

value of all financial assets - all financial liabilities

Question 10

what type of variable is wealth

Answer 10

stock

Question 11

investment

Answer 11

purchase of new goods

Question 12

financial investment

Answer 12

purchase of shares / other financial assets

Question 13

increase in interest rate affect of demand for money

Answer 13

decrease; people put more of their wealth into bonds

Question 14

Md relationship with nominal income

Answer 14

proportional

Question 15

Md relationship with interest rate

Answer 15

negatively dependent on i

Question 16

equilibrium in financial markets requires

Answer 16

money supply = money demand

Question 17

CB change supply of money by

Answer 17

buying / selling bonds in bond market

Question 18

expansionary open market operations

Answer 18

CB buy bonds to expand supply of money, which decreases interest rate

Question 19

contractionary open market operations

Answer 19

CB sells bonds to contract supply of money, raising interest rate

Question 20

assets of CB

Answer 20

bonds it holds

Question 21

liabilities of CB

Answer 21

stock of money in the economy

Question 22

open market operations used to

Answer 22

achieve desired interest rate

Question 23

how much do assets and liabilties increase by when CB buys bonds and issue money

Answer 23

the same

Question 24

higher price of bond on interest rate

Answer 24

lowered

Question 25

financial intermediaries

Answer 25

institutions that receive funds from people and firms, and use these funds to buy financial assets / make loans to other people and firms

Question 26

bank’s assets

Answer 26

reserves, loans, bonds

Question 27

bank’s liabilities

Answer 27

checkable deposits

Question 28

demand for CB comes from 2 sources

Answer 28

currency held by public, reserves held by banks

Question 29

CB money equilibrium condition

Answer 29

H = Hd (H is CB money)

Question 30

equilibrium interest rate

Answer 30

supply of CB money = demand for CB money