monetary transmission mechanism

Question 1

what does it mean to discount the future

Answer 1

you place higher value on things you can receive immediately vs things that take time

Question 2

present value formula

Answer 2

pv(rt) = rt / (1+i)^t (t is the amount of years) when the number beside r changes ( amount of years) then make the (1+i) to the power of the amount of years

Question 3

what is the formula for when you receive multiple payoffs (dividends)

Answer 3

R1/(1 + i) + R2/(1 + i)2 + R3/(1 + i)3 + … + RT/(1 + i)T

for each year of payment just change the T value for that year

Question 4

what is a bond

Answer 4

its a financial instrument that is used to borrow money and pays its lenders back with interest as well

Question 5

why would people hold money

Answer 5

money provides liquidity so if a better opportunity comes they can easily take advantage of opportunities

Question 6

relationship between money holding and interest rate

Answer 6

its a negative relation ship when interest rate goes up people hold more when it goes down people hold less

Question 7

relationship between demand for money and gdp

Answer 7

they are positively related so when gdp goes up the demand for money goes up too

Question 8

what does the monetary transmission mechanism do

Answer 8

it shows the relationship between changes in the money market and changes in the real economy

Question 9

lower interest rates two effects on AE

Answer 9

lowers the cost of investment for firms (direct) and also it impacts net exports (indirectly)

Question 10

how does lower interest rates effect net exports

Answer 10

the lower rates make investing in Canada more attractive to foreigners and they end up buying more of our cheaper goods because since they are investing here the supply of the dollar increases making it deprecated and goods cheaper