Slides 8-9 Flashcards
Why did M1 surge in the Fall of 2008?
Bank Run
Why did M2 sure in the aftermath of the Lehman Bankruptcy?
Find Out
A money growth rule focuses only on the growth rate of money ___, ignoring ___.
Long-Run, Short-Term Fluctuations
The equation of exchange is ___, and the velocity of money is the number of times the ___.
MV=PY, number of times the average dollar is spent on final goods and services
Monetarists believe velocity is ___.
Stable or at least predictable
M1 growth and velocity changed drastically beginning the 1980s, without ___. The M2 growth rate trended up also, without ___.
Leading to increased inflation, (same again)
P=MV/Q is also
MV/Real GDP
Monetarists are those economists who believe that the velocity of money is ___.
Fairly constant or predictable
Activist rules allow for ___, and non-activist rules believe in ___. Monetarists believe in ___ rules.
Allow for changes in monetary policy in response to business cycle fluctuations, Non-activist: keeping monetary policy unchanged in response to business cycle. Non-activist
In a paper published by Friedman, he stated that in the long run, increased monetary growth ___ but has little or no effect on ___.
Increased, Output
Friedman’s solution was that if the Fed were required to increase the money supply at the same rate as real GDP increased, then ___ would disappear.
Inflation
Friedman questioned the ability of the central banks to effectively engage in ___; given the lags between adjustments and macro-activities, policymakers were not capable of appropriately timing policy changes.
Counter-cyclical policy
Milton favored ___, because he did not believe central bankers were wise enough to improve on outcomes.
Steady money growth
Keynes motives for holding money balances were: ___, ___, and ___.
Transactions, Precautionary, Speculative
Keyne’s transaction motive was that ___. His precautionary motive was ___, and his speculative motive was ___.
Transactions: the amount of desired money balances was a function of income, higher inc=more money Dx Precautionary: people prefer to have liquidity, higher uncertainty=greater Dx for precautionary balances; Speculative: people retain liquidity when interest rates are low, and buy bonds when interest rates are high.
The liquidity trap refers to a situation where a country’s ___ has been ___ nearly or equal to zero to avoid a recesstion.
Nominal interest rate, Lowered
If $100 is invested at 10% for 2 years, what would its future value be?
$100x(1.10)(1.10)=$121.00
What is the PV of a payment of $121.00 2 years in the future?
PV=$121.00/(1.10)^2=$100
What are the four types of credit market instruments?
Simple loan, fixed payment loan, coupon bond, discount bond (zero coupon bond)
For a simple loan, the yield to maturity equals the ___.
Interest rate
The price of a coupon bond and the yield to maturity are ___ related.
Negatively
The yield to maturity on discount bonds is i=___.
i=(F-P)/P where F=Face value of bond and P=Current price of the discount bond
The return equals the YTM only if the holding period equals ___.
Time to Maturity
A rise in interest rates causes bond prices to ___, resulting in a ___ if time to maturity is ___ than the holding period.
Fall, Capital Loss, If Time to Maturity is Longer Than
The longer a bond’s maturity, the ___ the size of a change in the percentage price associated with an interest rate change.
The Greater
Can bond returns be negative? Explain
Yes, if it has a substantial initial interest rate and interest rates rise.
The lower the coupon, the ___ percentage price change.
The Greater
Duration measures the percent change in price per change in ___, it is the 1st derivative of ___.
Yield, 1st Dx of PV
The security with the higher Duration provides the ___ percent change in price for a given change in yield.
Larger
Friedman’s money supply rule was that if the Fed were to increase the money supply at the same rate as real GDP, then ___ would disappear.
Inflation
