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Macroeconomics > Chapter 12 > Flashcards

Chapter 12 Flashcards

1
Q

What are the 2 categories of financial wealth?

A

Money and bonds

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2
Q

What is money?

A

It is all assets that serve as a medium of exchange - paper money, coins, and bank deposits that can be transferred on demand by cheque or electronic means

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3
Q

What are bonds?

A

They are all other forms of financial wealth, which includes interest-earning financial assets and ownership shares in firms

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4
Q

What does present value equal to?

A

It equals to discounted present value

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5
Q

What does a higher market interest rate lead to?

A

It leads to a lower present value

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6
Q

What is present value?

A

It is the value now of one or more payments or receipts made in the future

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7
Q

What is the equation for present value (PV)?

A

PV = Rt/(1+i)^t

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8
Q

What is the present value of any bond that promises one or more future payments is negatively related to?

A

It is negatively related to the market interest rate

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9
Q

What is the present value of a bond?

A

It is the most someone is willing to pay now to own the bond’s future stream of payments

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10
Q

What is the equilibrium market price of any bond?

A

It is the present value of the income stream that it produces

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11
Q

What does an increase in the market interest rate lead to?

A

It leads to a fall in the price of any given bond

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12
Q

What does a decrease in the market interest rate lead to?

A

It leads to an increase in the price of any given bond

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13
Q

What is the cost of investment of a bond equal to? What is the return on this investment equal to?

A

Cost of investment = price of the bond
Return on the investment = sequence of future payments

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14
Q

For any given sequence of future payments, a lower bond price implies what?

A

A higher rate of return on the bond, or a higher bond yield

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15
Q

Do market interest rates and bond yields tend to move together?

A

Yes they do

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16
Q

What does an increase in the riskiness of any bond lead to?

A

It leads to a decline in its expected present value and a decline in the bond’s price so the lower bond price implies a higher bond yield

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17
Q

What the demand for money?

A

It is the amount of money that everyone collectively wants to hold at any time

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18
Q

Why do firms and households hold money?

A
  1. Transactions demand for money
  2. Precautionary demand for money
  3. Speculative demand for money
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19
Q

What is the amount of money demanded influenced by?

A

It is influenced by interest rates, real GDP, and the price level

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20
Q

What is the demand for money assumed to be negatively related to?

A

The interest rate

21
Q

What is the demand for money assumed to be positively related to?

A

Real GDP

22
Q

What is the demand for money assumed to be positively related to?

A

Price level

23
Q

What does a decrease in the interest rate lead to?

A

A decrease in the opportunity cost of holding money

24
Q

What are movements along the MD curve cause by?

A

By the substitution of assets between money and bonds

25
Q

What does an increase in real GDP or increase in price level do to the money demand curve?

A

It shifts it to the right

26
Q

What does an increase in the interest rate increase?

A

It increases the opportunity cost of holding money and leads to a reduction in the quantity of money demanded

27
Q

What does an increase in real GDP increase?

A

It increases the volume of transactions and leads to an increase in the quantity of money demanded

28
Q

What does an increase in the price level increase?

A

It increases the dollar value of a given volume of transactions and leads to an increase in the quantity of money demanded

29
Q

Why is money supply vertical?

A

Because it is a stock variable

30
Q

What are the 3 things that the money transmission mechanism describes?

A
  1. Changes in the demand for money or the supply of money cause a change in the equilibrium interest rate in the short run.
  2. The change in the equilibrium interest rate leads to a change in desired investment and consumption
    expenditure (and net exports in an open economy).
  3. The change in desired aggregate expenditure leads to a shift in the AD curve and to short-run changes in real GDP and the price level.
31
Q

What does an increase in the money supply reduce?

A

It reduces the equilibrium interest rate

32
Q

What does an increase in the demand for money increase?

A

It increases the equilibrium interest rate

33
Q

What does an increase in the supply of money do to the interest rate?

A

It makes it fall in the short run

34
Q

What does an increase in the demand for money do to the interest rate?

A

It makes the interest rate increase in the short run

35
Q

In an open economy, if there is an increase in Canadian money supply what happens to Canada’s interest rates?

A

They decrease which leads to an outflow of financial capital

36
Q

What does capital outflow do?

A

It makes the Canadian dollar depreciate

37
Q

What happens when there is an increase in the money supply in an open economy with capital mobiltiy?

A

The aggregate demand increased for 2 reasons:
1. decrease in interest rates increases investment
2. there is a lower interest rate which leads to capital outflow and currency depreciation, which increases net exports

38
Q

What does a rise in the price level raise?

A

It raises the money value of transactions and leads to an increase in the demand for money

39
Q

What does the long-run money neutrality describe?

A

That Y* is unaffected by changes in money supply

40
Q

What does money neutrality tell us in the long-run if money supply increases?

A

That the price level will increase but potential output does not change

41
Q

What is the Hysteresis Effect?

A

It is possibility that the short-run path of GDP may have an influence on Y

42
Q

Why is there the possibility that GDP may have an influence on Y?

A

Because a change in the money supply, through its effect on the interest rate, can affect investment and technological change
In a long period of unemployment, workers can lose human capital, which can affect Y* and its growth rate

43
Q

Is money neutral in the short run?

A

No it is not

44
Q

What is the ability of monetary policy to induce short-run changes in real GDP dependent on?

A

It is dependent on the slopes of the money demand and investment demand curves

45
Q

When is monetary policy effective in correspondence with the money demand and investment demand curves?

A

The steeper the money demand curve and the flatter the investment demand curve the more effective is monetary policy

46
Q

What did Keynesians ague about monetary [olicy?

A

That it was not very effective as the MD curve was relatively flat and the ID curve was relatively steep

47
Q

What did the Monetarists argue about monetary policy?

A

That it was very effective as the MD curve was relatively steep and the ID curve was relatively flat

48
Q

What does empirical research suggest about money demand?

A

That is is relatively insensitive to changes in the interest rate
The MD curve is quite steep and, as a result, changes in the money supply cause relatively large changes in interest rates
Though the ID curve is downward sloping, there is no consensus on wether the curve is steep or flat

Macroeconomics (14 decks)

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