Book: Financial Markets 1 Flashcards
What is money in an economic context
Currency or checkable bank deposits that you can use to perform transactions
What are bonds in an economic context
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
What determines the preferred ratio between currency and financial assets
Your level of transactions necessitating liquidity and the interest rate on the financial assets
What are money market mutual funds
A fund that uses many peoples money to buy bonds, often government bonds
What does Md = $Y*L(i) mean
(-)
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
If the money supply increases, what happens yo the interest rate
It decreases
If the interest rate increases what happens to the money supply
It decreases
What happens when the amount if nominal income increases
Interest rate increases
What are open market operations
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
What are expansionary open market operations
When the central bank expands the money supply by buying bonds with created money
What are contractionary open market operations
When the central bank decreases the money supply by selling bonds and destroying the money it gets
What are treasury bills or t bills
Bonds issued by the government promising payment in leas than a year
What is the equation for the interest rate of a bond
I = ( return - price of the bond) / price of bond
How is the price if a bond calculated
$Pb = return/(1+i)
i stand for interest rate
What does the phrase bond markets went up today mean
That the price if bonds went up and therefor interest rates decreased
What for it mean that the liabilities of banks are equal to their checkable deposits
That they owe their users all the money they have in their accounts
Where does banks hold their reserves
In cash and in their central bank account
Why do banks need reserves
Because people may take out more then they put in at any moment, because people trade with others with accounts in other banks, they are forced to by law and because the central bank pays interest
What are the two components of central bank money
Money demanded by the public and money demanded by banks as reserves
How are required reserves calculated
Required reserves = required reserve rate * money demanded
Hd = OMd = O$Y*L(i)
What is the federal funds market
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.
Why is the federal funds rate seen as the main indicator of us monetary policy
Because it is the numbers that show what the central bank does
What is a liquidity trap
When interest rate is zero and monetary policy no longer works because the zero lower bound
Why foes the zero lower bound exist
Because if bonds have no interest people have no reason to invest in them except to secure large cash amounts
