Unit 4 Flashcards
Define Financial Sector
Network of institutions that link borrowers and lenders. Includes banks, mutual funds, pension funds, and other financial intermediaries.
Define Assets
Anything tangible or intangible that has value.
Define Interest Rate
The amount a lender charges a borrower for borrowing money. It’s the price of a loan.
Define Interest-Bearing Asset
Assets that earn interest over time such as bonds.
Define Bonds (Securities/Treasuries)
Loans, or IOU’s, that represent debt that the government, business, or individual must repay the lender.
Define Stocks (Equities)
Represent ownership of a corporation and the stockholder is often entitled to a portion of the profit paid out as dividends.
Define Liquidity
The ease with which an asset can be converted to a medium of exchange. In general, the higher the liquidity the lower the rate of return.
Define Demand Deposits
Money deposited by customers in a commercial bank. This can be used to buy goods and services with a check.
Explain the relationship between the price of previously issued bonds and interest rates.
They are inversely related; people prefer high interest rates because they give a greater rate of return. If rates for new bonds go up, people would prefer them to previously issued bonds. This causes the price of previously issued bonds to decrease.
What’s the equation for the nominal interest rate?
Nominal Interest Rate= Real Interest Rate+ Expected Inflation NRE
What’s the equation for the real interest rate?
Real Interest Rate= Nominal Interest Rate- Expected Inflation
What are the functions of money?
Medium of Exchange- Unit of Account- Store of Value MUS
Define Medium of Exchange
Money can easily be used to buy goods and services with no complications of barter system.
Define Unit of Account
Money measures the value of all goods and services. Money acts as a measurement of value.
Define Store of Value
Money allows you to store purchasing power for the future.
What is M1 consisted of?
M1= Currency in circulation, demand deposits, and traveler’s checks.
CDT
What is M2 consisted of?
M2= M1+ Savings Accounts and CDs
Define Assets
Things that a bank owns like bonds, car loans, mortgages, and reserves.
Define Liabilities
Things that a bank owes like demand deposits.
Define Required Reserves
The percent that the bank must hold by law.
Define Excess Reserves
The amount that the bank can loan out.
Define Fractional Reserve Banking
When banks hold a portion of deposits to cover potential withdrawals and the loan the rest of the money out.
What is the equation for the Money Multiplier?
1/RRR
What is the monetary base and what is it consisted of?
M0; consisted of currency in circulation and bank reserves.
What are the types of demand for money?
Transaction Demand-Asset Demand
Define the Transaction Demand for Money
People hold money for everyday transactions.
Define Asset Demand for Money
People hold money since it is less risky than other assets.
What are the shifters on the Money Market graph for the demand of money?
Change in Price Level, Income, and Technology. PIT
What are the shifters on the Money Market graph for the supply of money?
Reserve Requirements- Discount Rates- Open Market Operations (buying and selling bonds)- Federal Funds Rate RDOF
If we decrease the reserve requirement, that would _____ the money supply.
Increase
Define Open Market Operations
When the central bank buys or sells government bonds (securities). This is the most important and widely used monetary policy.
Define the Federal Funds Rate
The interest that banks charge one another for one day loans or reserves.
Define the Discount Rate
The rate the central bank charges commercial banks.
Define Bank Balance Sheets
Shows the specific assets and liabilities for a bank.
Define Owner’s Equity
Money owed to the owners or shareholders of the bank.
What is the Equation for the Maximum Deposit Expansion
Excess Reserves x Money Multiplier MEM
What are the shifters of AD?
C/Ig/G/Xn
What are the shifters of SRAS?
Change in the Price of Resources-Changes in Taxes/Subsidies/Regulations- Change in Productivity-Expectations of Inflation S-PTPI
How will SRAS shift if there is an expectation of an increase in Inflation?
Left
What happens when everything else is at equilibrium but SRAS is shifted to the left?
Stagflation
What is the relationship between expected inflation and unemployment rate?
Inverse
If AD changes, you make a _____ curve in the Philip’s Model Curve
Left/Right
When there is a change in SRAS, the SRPC either moves _____ or _____
Up or Down (for example if SRAS moves left, SRPC moves up)
Deceasing structural and/or frictional unemployment will _____ LRPC.
Decrease
Increasing structural and/or frictional unemployment will _____ LRPC.
Increase
LRPC will shift to the _____ to show growth.
Left
If SRAS moves to the left, SRPC will move _____.
Up (and the point will move to the right)
The shifts in the loanable funds market are based off of the?
Whether there is a trade deficit or trade surplus. (The TR/GS graph)
What is the equation for total reserves?
TR=ER+RR
What happens to the bond market graph when you buy bonds?
DB and PB go up
What happens to the bond market graph when you sell bonds
SB goes up and PB goes down
How do you calculate the yield percentage?
Yield/Price x 100
Define Quantity Theory of Money
the amount of money in circulation is equal to the value of the goods/services sold.
What is the equation for the quantity theory of money?
MV=PY (Money Supply x Velocity of Money= Price Level x Output)
Define Velocity of Money
How many times a dollar is used in a transaction in a given year.
What is M3 consisted of?
M1+M2+ Large Time Deposits+Larger Liquid Assets
What is M0 consisted of?
M0= Monetary Base- Currency (currency in circulation) and Bank Reserves
MCB
