Topic 3 - IS-LM model 2 Flashcards
what is the real interest rate
the difference between nominal interest rate and expected inflation
why is the relationship between real and nominal interest rates more important after 2008
nominal interest rates were closer to zero in many advanced economies
what does the IS-LM model assume about interest rates (which is a limitation)
That there is only a single interest rate
in the real world are there multiple interest rates?
Many different interest rates faced by governments, households and firms
what is an equation for interest rates with risk premium
1 + i + x
what makes x (risk premium) larger
the probability of default is higher
when lenders are risk averse
there is more uncertainty
what does the IS-LM model assume about the central bank
That the central bank sets interest rates in the economy
In reality there are many different types of financial intermeditaries
what are bank liabilities
may be demand deposits, interest paying deposits or borrowing from investors or other banks
what are bank assets
may be reserves, loans to consumers, loans to firms, loans to other banks, government bonds, mortgages
what is the capital ratio and how is it calculated
the ratio of capital to it’s assets
Capital/ assets
what is the leverage ratio
the ratio of assets to capital
assets/ capital
