Lecture 4 Continued Flashcards
PPP = ?
purchasing power parity
based on the law of one price
refers to situations where your income has the same purchasing power in all countries
two types of PPP?
absolute PPP
relative PPP
purchasing power = ?
the amount of goods/services you can acquire with a certain amount of money
absolute PPP = ?
the same product in different countries should be equal in value
the law of one price
relative PPP = ?
takes inflation into account as price level will increase
fishers effect = ?
describes the relationship between the inflation rate and the nominal interest rate
fisher effect observes that nominal interest rate will increase to counteract inflation
inflation and interest rates move in tandem
equilibrium price = ?
the interaction between buyers & sellers determine the price
equilibrium price is the price where the quantity demanded is equal to the quantity supplied
international fisher effect (IFE) = ?
the real rate of interest represents the return on the investment to savers after accounting for expected inflation
how is exchange rate calculated?
price of 1 country’s currency/price of another country’s currency
why doesn’t absolute PPP hold up in the economy?
non tradable goods
transportation costs & trade restrictions
imperfect information
how do you calculate relative PPP?
calculate currency exchange rate
currency exchange rate * interest rate = new exchange rate
this means the first currency in the pair (which isn’t 1) is depreciating and the second currency (which is 1) is appreciating
what is a better measure of currency purchasing power, relative or absolute PPP?
relative PPP
hedge = ?
an investment to counter or minimise the risk of adverse price movements in an asset or security
liquid = ?
very easy to buy/sell in large quantities
what are the different ways of measuring MS?
MS = money supply
M1 and M2
MS = ?
money supply
the amount of money circulating in the economy
M1 = ?
includes cash, checking accounts and travellers checks
M2 = ?
encompasses M1, savings accounts, mutual fund accounts and CDs
cash = ?
money exchangeable for goods & services
checking accounts = ?
money deposited in the bank
travellers checks = ?
was used in the past to cover expenses whilst on holiday
savings accounts = ?
money in the bank, not used for demand deposits
demand deposits = ?
a deposit money that can be withdrawn at any point without prior notice (e.g., in a current account)
mutual fund accounts = ?
diversified investments in stocks/bonds
certificates of deposits (CDs) = ?
money in a CD accessible in less than 1 year
what will dictate how large/small money supply is?
it depends on the types of money that is circulating in the economy (i.e. level of liquidity included)
M1 money supply examples
currency
demand deposits
travellers checks
other checkable deposits
M2 money supply examples
everything in M1
savings deposits
time deposits < $100,000
retail MMMFs
N.O.W = ?
negotiable order of withdrawl
demand deposits = ?
checking accounts,
generally 40% of M1 MS
currency = ?
cash
generally 43% of M1 MS
MMDAs = ?
money market deposit accounts
MMMFs = ?
money market mutual funds
issue shares to customers and invest the proceeds in highly liquid, very short maturity, interest bearing securities (money market investments)
are stocks and bonds / stock & bond mutual funds considered as part of MS?
no, because the value fluctuates too much
credit cards = ?
provide predetermined credit limits to consumers at the time the cards are issued
allow its holders to borrow up to a predetermined limit
gross domestic product (GDP) = ?
a measure of the output of goods/services in an economy
velocity of money (VM) = ?
the rate of circulation of money supply
what is monetarists view equation = ?
GDP = VM x MS
what is the alternative to monetarists view?
GDP = RO x PL
keynisians view = ?
a change in money supply first causes a change in interest rate levels which then alters the demand for goods & services, which then causes GDP to grow
repurchase agreement = ?
a short-term debt security which promises repurchase at a particular date for a particular price
not part of MS as its a security, not money
large denomination time deposits = ?
a bank deposit that cannot be withdrawn before a specific date
excluded from MS as it’s not highly liquid
institutional MMMFs = ?
cannot be used as a medium of exchange and aren’t highly liquid
include hedge funds, pension funds and insurance companies
