Lecture 2 - Financial Markets Flashcards
Money is used for…
Transactions, but it pays no interest.
Bonds pay…
Interest rate but cannot be used for transactions.
The holding of money and bonds depend on…
- Your level of transactions.
- The interest rate on bonds.
The demand for money depends positively on…
Income.
The demand for money depends negatively on…
The interest rate.
Central banks typically change the supply of money by buying or selling bonds in the bond market. What are these called?
Open market operations.
What are expansionary open market operations?
The central bank expands the supply of money by buying bonds.
What are contractionary open market operations?
The central bank contracts the supply of money by selling bonds.
Rather than the money supply, the central bank could have…
Chosen the interest rate and then adjusted the money supply so as to achieve the interest rate it had chosen.
Choosing the interest rate instead of the…
Money supply is what modern central banks typically do.
What is zero lower bound?
The interest rate cannot go below zero.
The economy is in a liquidity trap when…
The interest rate is down to zero, monetary policy cannot decrease it further.
