Lecture 4 Continued

Question 1

PPP = ?

Answer 1

purchasing power parity

based on the law of one price

refers to situations where your income has the same purchasing power in all countries

Question 2

two types of PPP?

Answer 2

absolute PPP
relative PPP

Question 3

purchasing power = ?

Answer 3

the amount of goods/services you can acquire with a certain amount of money

Question 4

absolute PPP = ?

Answer 4

the same product in different countries should be equal in value

the law of one price

Question 5

relative PPP = ?

Answer 5

takes inflation into account as price level will increase

Question 6

fishers effect = ?

Answer 6

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

Question 7

equilibrium price = ?

Answer 7

the interaction between buyers & sellers determine the price

equilibrium price is the price where the quantity demanded is equal to the quantity supplied

Question 8

international fisher effect (IFE) = ?

Answer 8

the real rate of interest represents the return on the investment to savers after accounting for expected inflation

Question 9

how is exchange rate calculated?

Answer 9

price of 1 country’s currency/price of another country’s currency

Question 10

why doesn’t absolute PPP hold up in the economy?

Answer 10

non tradable goods

transportation costs & trade restrictions

imperfect information

Question 11

how do you calculate relative PPP?

Answer 11

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

Question 12

what is a better measure of currency purchasing power, relative or absolute PPP?

Answer 12

relative PPP

Question 13

hedge = ?

Answer 13

an investment to counter or minimise the risk of adverse price movements in an asset or security

Question 14

liquid = ?

Answer 14

very easy to buy/sell in large quantities

Question 15

what are the different ways of measuring MS?

Answer 15

MS = money supply

M1 and M2

Question 16

MS = ?

Answer 16

money supply

the amount of money circulating in the economy

Question 17

M1 = ?

Answer 17

includes cash, checking accounts and travellers checks

Question 18

M2 = ?

Answer 18

encompasses M1, savings accounts, mutual fund accounts and CDs

Question 19

cash = ?

Answer 19

money exchangeable for goods & services

Question 20

checking accounts = ?

Answer 20

money deposited in the bank

Question 21

travellers checks = ?

Answer 21

was used in the past to cover expenses whilst on holiday

Question 22

savings accounts = ?

Answer 22

money in the bank, not used for demand deposits

Question 23

demand deposits = ?

Answer 23

a deposit money that can be withdrawn at any point without prior notice (e.g., in a current account)

Question 24

mutual fund accounts = ?

Answer 24

diversified investments in stocks/bonds

Question 25

certificates of deposits (CDs) = ?

Answer 25

money in a CD accessible in less than 1 year

Question 26

what will dictate how large/small money supply is?

Answer 26

it depends on the types of money that is circulating in the economy (i.e. level of liquidity included)

Question 27

M1 money supply examples

Answer 27

currency
demand deposits
travellers checks
other checkable deposits

Question 28

M2 money supply examples

Answer 28

everything in M1
savings deposits
time deposits < $100,000
retail MMMFs

Question 29

N.O.W = ?

Answer 29

negotiable order of withdrawl

Question 30

demand deposits = ?

Answer 30

checking accounts,

generally 40% of M1 MS

Question 31

currency = ?

Answer 31

cash

generally 43% of M1 MS

Question 32

MMDAs = ?

Answer 32

money market deposit accounts

Question 33

MMMFs = ?

Answer 33

money market mutual funds

issue shares to customers and invest the proceeds in highly liquid, very short maturity, interest bearing securities (money market investments)

Question 34

are stocks and bonds / stock & bond mutual funds considered as part of MS?

Answer 34

no, because the value fluctuates too much

Question 35

credit cards = ?

Answer 35

provide predetermined credit limits to consumers at the time the cards are issued

allow its holders to borrow up to a predetermined limit

Question 36

gross domestic product (GDP) = ?

Answer 36

a measure of the output of goods/services in an economy

Question 37

velocity of money (VM) = ?

Answer 37

the rate of circulation of money supply

Question 38

what is monetarists view equation = ?

Answer 38

GDP = VM x MS

Question 39

what is the alternative to monetarists view?

Answer 39

GDP = RO x PL

Question 40

keynisians view = ?

Answer 40

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

Question 41

repurchase agreement = ?

Answer 41

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

Question 42

large denomination time deposits = ?

Answer 42

a bank deposit that cannot be withdrawn before a specific date

excluded from MS as it’s not highly liquid

Question 43

institutional MMMFs = ?

Answer 43

cannot be used as a medium of exchange and aren’t highly liquid

include hedge funds, pension funds and insurance companies