money and monetary policy part 2 Flashcards
What are financial intermediaries?
Institutions specialising in financial transactions.
What is the function of financial intermediaries?
To act as intermediaries between surplus units and deficit units in the monetary economy.
What do financial intermediaries do?
They accept deposits and grant credit.
What is credit?
When a person or institution lends funds to another person or institution.
What is a security?
A document that specifies the interest rate at which funds have been borrowed and the terms of repayment.
What is the law of demand?
As the price of a good increases, the quantity demanded decreases, ceteris paribus.
What is the law of supply?
As the price of a good increases, the quantity supplied increases, ceteris paribus.
What does ceteris paribus mean?
All other things being equal.
What are the two types of assets wealth can be held in?
Real assets and financial assets.
What are real assets?
Fixed property, valuable goods, shares.
What are financial assets?
Money or interest-bearing assets like bonds.
What is the opportunity cost of holding money?
The interest forgone by not investing in interest-bearing assets.
What are the two components of the demand for money?
Transactions demand and demand for money as an asset.
What is transactions demand?
The demand for money as a medium of exchange.
What is the demand for money?
The amount that various participants in the economy plan to hold in the form of money balances.
What is the difference between demand and want?
Demand for money is concerned with the choices of those who earn an income or possess wealth.
Why do households and firms wish to hold money?
Despite the cost involved, money provides services valued at least as highly as the opportunity cost of holding it.
What are the motives for holding money?
Transactions motive, precautionary motive, and speculative motive.
What is the relationship between the quantity of money demanded for speculative purposes and interest rates?
There is a negative relationship; as interest rates rise, the quantity demanded for speculative purposes decreases.
What is liquidity preference?
The demand for active balances (transactions + precautionary) and passive balances (speculative).
How sensitive is the demand for active balances to interest rates?
L1 (active balances) is not sensitive to the interest rate.
How sensitive is the demand for passive balances to interest rates?
L2 (passive balances) is sensitive to the interest rate.
