Chapter 12 Flashcards
What is the Relationship Between Market Interest Rate and Bond Price?
The present value of a bond is negatively related to the market interest rate. As the market interest rate increases, the price of the bond decreases, and vice versa.
What is the Yield on a Bond?
The yield on a bond is the rate of return the bondholder receives, calculated by buying the bond at its purchase price and receiving all future payments the bond offers. A lower purchase price implies a higher yield.
How Does Perceived Riskiness Affect Bonds?
An increase in the perceived riskiness of bonds leads to a reduction in bond prices and an increase in bond yields.
What are the Two Main Financial Assets in Our Macro Model?
Households and firms divide their financial assets between interest-bearing “bonds” and non-interest-bearing “money.”
What is the Opportunity Cost of Holding Money?
The opportunity cost of holding money is the interest that would have been earned if bonds were held instead.
What Influences Desired Money Holdings?
Desired money holdings are influenced by changes in the interest rate, real GDP, and the price level.
How Do Increases in Interest Rate, Real GDP, and Price Level Affect Money Demand?
Increases in the interest rate reduce desired money holdings. Increases in real GDP and the price level increase desired money holdings.
What is the Money Demand (MD) Curve?
The MD curve shows the negative relationship between interest rates (i) and desired money holding (M). Increases in real GDP (Y) or the price level (P) shift the MD curve rightward.
How is the Interest Rate Determined in the Short Run?
The interest rate is determined by the interaction of money supply and money demand. Monetary equilibrium is established when the quantity of money supplied equals the quantity of money demanded.
What Leads to a Change in the Equilibrium Interest Rate?
Changes in the money supply or in the demand for money (due to changes in Y or P) lead to changes in the equilibrium interest rate.
What is the First Stage of the Monetary Transmission Mechanism?
The first stage is the change in the money supply or demand leading to a change in the equilibrium interest rate.
What is the Second Stage of the Monetary Transmission Mechanism?
The second stage is the change in the interest rate leading to changes in desired investment and consumption expenditure, as well as capital flows, exchange rate changes, and net exports in an open economy.
What is the Third Stage of the Monetary Transmission Mechanism?
The third stage is the change in desired investment, consumption, or net exports leading to a shift in the aggregate demand (AD) curve, affecting real GDP and the price level.
What are the Short-Run and Long-Run Effects of Changes in the Money Supply?
In the short run, changes in the money supply affect real GDP depending on the shapes of the MD and AS curves. In the long run, money is neutral if changes in the money supply do not affect the long-run level of real GDP.
What is the Neutrality of Money?
Money is neutral in the long run if changes in the money supply lead to no changes in the long-run level of real GDP or other real variables.
