Book: Financial Markets 1

Question 1

What is money in an economic context

Answer 1

Currency or checkable bank deposits that you can use to perform transactions

Question 2

What are bonds in an economic context

Answer 2

A financial asset representing a loan to another entity like a government, company or bank. They cannot be used for transaction but unlike currency pay positive interest Although there is often a transaction fee to convert currency to bonds

Question 3

What determines the preferred ratio between currency and financial assets

Answer 3

Your level of transactions necessitating liquidity and the interest rate on the financial assets

Question 4

What are money market mutual funds

Answer 4

A fund that uses many peoples money to buy bonds, often government bonds

Question 5

What does Md = $Y*L(i) mean
(-)

Answer 5

That the demand for money Md is a function of the demand or level of transactions nominally times the interest rate and that as interest rates rise the demand for money decreases

Question 6

If the money supply increases, what happens yo the interest rate

Answer 6

It decreases

Question 7

If the interest rate increases what happens to the money supply

Answer 7

It decreases

Question 8

What happens when the amount if nominal income increases

Answer 8

Interest rate increases

Question 9

What are open market operations

Answer 9

The central bank can buy bonds and pay for them with currency it creates or sell bonds and eliminate the money it receives to control the money circulation in the economy

Question 10

What are expansionary open market operations

Answer 10

When the central bank expands the money supply by buying bonds with created money

Question 11

What are contractionary open market operations

Answer 11

When the central bank decreases the money supply by selling bonds and destroying the money it gets

Question 12

What are treasury bills or t bills

Answer 12

Bonds issued by the government promising payment in leas than a year

Question 13

What is the equation for the interest rate of a bond

Answer 13

I = ( return - price of the bond) / price of bond

Question 14

How is the price if a bond calculated

Answer 14

$Pb = return/(1+i)
i stand for interest rate

Question 15

What does the phrase bond markets went up today mean

Answer 15

That the price if bonds went up and therefor interest rates decreased

Question 16

What for it mean that the liabilities of banks are equal to their checkable deposits

Answer 16

That they owe their users all the money they have in their accounts

Question 17

Where does banks hold their reserves

Answer 17

In cash and in their central bank account

Question 18

Why do banks need reserves

Answer 18

Because people may take out more then they put in at any moment, because people trade with others with accounts in other banks, they are forced to by law and because the central bank pays interest

Question 19

What are the two components of central bank money

Answer 19

Money demanded by the public and money demanded by banks as reserves

Question 20

How are required reserves calculated

Answer 20

Required reserves = required reserve rate * money demanded

Hd = OMd = O$Y*L(i)

Question 21

What is the federal funds market

Answer 21

The market for bank reserves where supply and demand decides interest although as the central bank controls supply they affectively control the federal funds rate.

Question 22

Why is the federal funds rate seen as the main indicator of us monetary policy

Answer 22

Because it is the numbers that show what the central bank does

Question 23

What is a liquidity trap

Answer 23

When interest rate is zero and monetary policy no longer works because the zero lower bound

Question 24

Why foes the zero lower bound exist

Answer 24

Because if bonds have no interest people have no reason to invest in them except to secure large cash amounts