asset market

Question 1

M2 are…

Answer 1

components in M1
small time deposits
money mkt mutual funds

Question 2

open mkt purhcases

Answer 2

use newly printed money to buy financial assets from the public, increase money SS

Question 3

open mkt sales

Answer 3

sell financial assets to public, decrease money SS

Question 4

portfolio allocation: trade off btn

Answer 4

risk, expected return, liquidity

Question 5

money dd function

Answer 5

(M/P)^d=L(Y, i)

depend negatively on i

Question 6

i=

Answer 6

r+ pi^e (expected inflation)

Question 7

real rate of interest

Answer 7

growth rate of purchasing power, r. in terms of units of goods

Question 8

nominal rate of interest

Answer 8

growth rate of money invested, return in dollar terms

Question 9

1+r =

Answer 9

(1+i)/(1+pi)

1+i = return in terms of dollars from giving up 1 unit of money in P1
1+r = return in terms of units of goods

$1 next period = (1+i)/Pt+1 units of goods
$1 this period = 1/Pt

1+r = [(1+i)/(Pt+1)] / (1/Pt) = 1+i/(Pt+1/Pt) = 1+i/1+pi

Question 10

r =

Answer 10

(i-pi)/(1+pi) or i-pi

with constant interest rate, nominal interest rate changes one-for-one w changes in expected inflation rate

Question 11

Walras law

Answer 11

eqm in asset mkt means there is eqm in money mkt too

Question 12

eqn of eqm

Answer 12

Ms/P = Md/P
M/P = L(r+pi^e, Y)

Question 13

graph r against M/P

interest rate against real money balances

Answer 13

(M/P)^s is a vertical line
L(Y,i) is downward sloping and convex

Question 14

if r>r*

Answer 14

qty of money supplied is more than qty demanded -> ppl will use money to buy non monetary assets –> as ppl try to buy bonds, bond issuers lower interest rate

Question 15

y=x1/x2

Answer 15

△y/y = △x1/x1 - △x2/x2

P = M/L(Y,i)

Question 16

y = f(x1,x2)

Answer 16

△y/y = n(y,x1)△x1/x1 + n(y,x2)△x2/x2

L(y,i)

Question 17

pi =

Answer 17

△M/M - n(y)△y/y - n(i)△i/i

inflation rate = growth rate of nominal money SS - adjustment of growth rate of real money DD due to growth rate in real output Y - adjustment for growth rate of real money DD due to growth in nominal interest i