AP EXAM: Unit 4 Flashcards

1
Q

What’s the most liquid form of money?

A

Cash

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2
Q

What are bonds?

A

Interest-bearing debt contracts issued by governments or corporations

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3
Q

Why is interest rate important in bonds?

A

No rational investor would be willing to pay without getting a sufficient rate of return, because there’s no benefit.

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4
Q

Interest on Investment (Formula)

A

Investor’s return/Purchase price x 100

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5
Q

Role of interest rate in investment and demand for money

A

Demand for money is inversely related to interest rate in the economy

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6
Q

How is nominal interest rate set?

A

Based on desired rate of return and expected rate of inflation

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7
Q

Role of expected inflation in the economy

A

Higher expected inflation will lead banks to raise the inflation premium and increase NIR

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8
Q

Commodity money

A

Value comes from the commodity of which it is made

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9
Q

Fiat money

A

No intrinsic value

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10
Q

Three functions of money

A

Medium of exchange, store of value, unit of account

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11
Q

Medium of exchange

A

Money is accepted as a means for purchasing goods, services, or other assets

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12
Q

Store of value

A

Assets can transfer purchasing power from present to future

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13
Q

Unit of account

A

Used to express the value of something

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14
Q

M0

A

Monetary base (currency in circulation, reserves held at bank)

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15
Q

M1

A

Monetary base + Demand Deposits

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16
Q

M2

A

M1 + Savings, MM Mutual Funds, broadest measure of money supply

17
Q

Reserve requirement ratio

A

Required reserves/Total deposits

18
Q

Money multiplier

19
Q

Relationship of money multipler and money supply/monetary base

A

Money multiplier is ratio of money supply to monetary base

20
Q

Other ways multiplier can be calculated

A

M2/M0 (Ratio of M2 over M0)

21
Q

Asset demand for money

A

Inversely related to the interest rate

22
Q

Transaction demand for money

A

Inversely related to the interest rate

23
Q

What causes changes in the money demand curve?

A

Change in national income and consumption

24
Q

Factors that shift the supply of money

A

Monetary policy

25
Relation between interest rates and demand for money
Inflation --> Money Demand increases, Deflation --> Money demand decreases
26
Tools for controlling supply of money used by central bank
Buying/selling of government bonds, changing reserve requirement ratio, changing discount rate
27
Formula for desired change in money supply
Change in excess reserves multiplied by the money multiplier
28
Needed sale of bonds formula
Desired change in money supply over money multiplier
29
Demand in the loanable funds market illustrates...
The relationship between the RIR and the willingness to save funds, and the willingness to borrow funds for investment
30
Formula for investment in a closed economy
I = Y (real output) - C (consumption) - G (government purchases)
31
In a closed economy, national savings...
Is the sum of both private sector and public sector savings
32
The supply of loanable funds describes the relationship between...
The real interest rate and the quantity of funds supplied by a nation's households and firms
33
Formula for investment in an open economy
I = National savings (S) + Net capital inflow