Midterm 2 Flashcards
Savings (National)
(Calculation)
Y-C-G
Savings (Private)
(Calculation)
Y-T-C or I + Government Deficit Budget
S (Public)/Government
(Calculation)
T-G
Net Taxes
(Calculation)
Total taxes - transfer payments - interest
Net Capital Inflow
(Calculation)
Export - Import or Import - Savings (National)
Why do people save?
Life cyle saving
Precautionary Saving
Bequest saving (Inheritance)
Real Interest Rate formula (Fisher’s Equation)
r = R - π
r - Real interest rate
R - Nominal interest rate
π - Inflation rate
Fisher Effect
Increase in inflation, increase in nominal interest rate by the same amount
3 Tasks of Financial System
Reduce transaction cost
Reduce risk
Liquidity
4 Types of financial assets
Loans
Bonds
Loan Backed Securities
Stocks
Financial Asset
Paper claim that entitles the buyer to future income
Physical Asset
Tangible object used to make future income
Liability
Requirement to pay income in the future
Net worth
(Calculation)
Assets - Liability
Flow
Measure per unit of time (saving)
Stock
Defined point in time (wealth)
Capital Gain
Asset increased in value
Capital Loss
Asset decreased in value
What is asset price determined by?
Fundamentals
Future Expectations
Currency in circulation
Cash held by the public
Checkable bank deposits
Bank account which people write cheques
Money Supply
Total value of financial assets in economy that are money
Uses of Money
Store of value
Medium of exchange
Unit of account
Types of money
Commodity money
Commodity-backed money
Fiat money
M1
(Calculation)
Currency + Checkable deposits
M2
(Calculation)
M1 + Savings and term deposits (that can be easily converted to M1)
Functions of central bank
Banker for commercial banks
Banker for federal government
Issues currency
Conducts monetary policy
Tools to control money supply
Reserve requirements
Bank interest rate
Open-Market operations
Government deposit switching
Overnight funds market
Market where banks lend each other money overnight
Bank Rate
Central Bank has reserve requirement
When cheques are cleared, banks gain or lose deposits.
If bank doesn’t have enough, it borrows money from other banks in overnight funds market.
Open Market Operation
Monetary policy used by central bank to control money supply. They deal with T-bills
Open Market Purchase
Central Bank buys T-bills from commercial banks. Done during recession or to add money supply
Open Market Sale
Central Bank sells T-bills to commercial banks. Usually done when they want to lessen money in circulation.
Quantity Theory of Money
(Calculation)
M * V = P * Y
M - Money supply
V - # of times money is used
P - Price level
Y - Real output
Inflation
(In respect to Quantity theory of money)
Money Supply growth rate (%M) - Real output growth rate (%Y)
Reserve Ratio
Portion of deposit bank keeps
kept amount/total
Multiplier
(Formula)
1/(1-MPC)
Consumption Function
c = a + MPC*yd
c - consumption
a - fixed spending
MPC - marginal propensity to consume
y - household disposable income
Investment Spending Dependencies
Interest rate
Future expectation of GDP
Current production capacity
Accelerator principle
Aggregate Expenditure
(Calculation)
C + I(Planned)
GDP (in terms of investment)
C + I(Total)
Equilibrium for Investment
GDP = AAggregate Expenditure
What does it mean if I (Unplanned) is negative?
That means demand was greater than the planned inventory they had. (Sales are higher than expected)
Bubble price meaning
Price increases due to unrealistic expectations for an asset
