Macroecon chapter 12 Flashcards
Assets in the economy (2)
- Money
- Bonds
Bonds definition
Interest payment overtime
Present value formula
R1/(1+i) + R2/(1+i)^2 + … + RI/(1+i)^T
Coupon bond
Coupon (c) = %face value (FV) = Coupon rate
Maturity time
C + FV are paid
Present value / Price bond formula
(C[1 - (1+i) ^-t])/i + FV(1+i)^-t
Link between Price bond and interest rate
Negative
Link between price bond and money demand
Positive
Link between price bond and bond demand
Negative
Link between interest rate and bond yield
Positive
Bond yield (Yb) formula
Coupon gain + capital gain
Motivation for firms and household to demand money
MD = f(transaction, precaution, speculation)
MD and interest rate relation
Negative
MD and real GDP relation
Positive
MD and price level relation
Positive
Δi in MD curve
Movement along the curve
ΔY and ΔP in MD curve
//shift left or right
Why is MS a vertical line?
MS is exogenous
MS and interest rate relation
Negative
MS and Consumption relation
Positive
MS and investment relation
Positive
MS and AE relation
Positive (shifts up)
MS and AD relation
Positive (shifts to the right)
Monetary transmission mechanic
ΔMD/ΔMS => Δi => ΔC/ΔI/ΔNx => ΔAE => ΔAD => ΔY
Why is the slop of AD negative (3)
- Wealth effect
- Substitution effect (through relative price)
- Interest rate effect
Interest rate effect
ΔP => ΔMD = Δi = ΔT/ΔC
Money neutrality at LR
ΔMS will not lead to ΔYp
Hysteresis
- ΔMS => ΔY => ΔYp
- ΔMS => Δi => ΔI => Δtech => ΔYp
How can monetary policy impact the long run GDP (Yp)
ΔMS => Δi => ΔAD => ΔUrate => ΔHK => ΔYp
Effects of monetary policies at SR (2)
- Depends on the slope of MD and ID
- If MD tends to be vertical and ID tends to be horizontal, Δi will lead to higher ΔY
Keynesians policies
MD horizonal
ID vertical
Small ΔY
Monetarist policies
MD vertical
ID horizontal
Higher ΔY
