W2P2 - NotebookLM Flashcards
What role do commercial banks play in the money supply?
Commercial banks create money through taking deposits and creating loans. This is now the largest part of overall money in circulation.
Explain the Fisher Equation.
Real interest rate = Nominal interest rate - Inflation expectations.
How do inflation expectations compare to actual inflation?
Inflation expectations tend to be less volatile than actual inflation and adjust more slowly, especially when monetary policy is reliable.
What happens to money demand as the economy grows?
As the economy grows, money demand increases over time.
What must central banks do to maintain a specific interest rate when money demand increases?
They must increase the money supply.
What is the long-run relationship between money supply and inflation?
There is a clear positive relationship: increasing the money supply leads to higher inflation in the long run.
How does a country’s inflation rate relate to its currency’s exchange rate against the US dollar?
Countries with higher inflation than the US tend to see their currency depreciate against the US dollar.
Explain absolute Purchasing Power Parity (PPP) and relative PPP.
Absolute PPP: the real exchange rate is equal to one. Relative PPP: the real exchange rate is constant.
In the short run, how does an increase in the money supply affect nominal exchange rates?
It leads to a greater depreciation than implied by PPP, followed by an appreciation towards a new long-run value.
How is the price of a bond calculated?
The price of a bond today is the discounted value of its future payout, calculated using the interest rate and the number of years until payout.
Describe the relationship between bond prices and interest rates.
There is an inverse relationship: as bond prices increase, interest rates decrease, and vice versa.
