The money market (Chapter 11, 14)

Question 1

Assets

Answer 1

• money

- bonds

Question 2

M1 Money

Answer 2

• currency + demand deposits, completely liquid

Question 3

Present Value (PV)

Answer 3

• current value of a future earnings stream

Question 4

Future Value (FV)

Answer 4

• the amount of money in the future that an amount of money today will yield

Question 5

1 year treasury bill

Answer 5

• bond that pays fixed amount (FV) after one year

Question 6

perpetuity

Answer 6

• bond that pays fixed amount annually (AP) forever

Question 7

cash flow (CFn)

Answer 7

• cash inflows minus cash outflows in a period n

Question 8

Velocity of money (V)

Answer 8

• the rate at which money changes hands

Question 9

Quantity theory of money

Answer 9

• the quantity o money available determines the price level and the growth rate in the quantity of money determines the inflation rate

Question 10

Hyperinflation

Answer 10

-excessive money growth causes excessive inflation

Question 11

monetary neutrality

Answer 11

• in long run, changes in money supply do not affect real variables

Question 12

Classical dichotomy

Answer 12

• theoretical separation of nominal and real variables

Question 13

Fischer effect

Answer 13

• the one-for-one adjustment of the nominal interest rate to the inflation rate

Question 14

shoe leather costs

Answer 14

• resources/time wasted when inflation induces people to reduce their money holdings

Question 15

menu costs

Answer 15

• cost of changing prices

Question 16

bracket creep

Answer 16

• in unindexed progressive tax system, rising nominal income pushes people into higher tax brackets

Question 17

arbitrary redistribution of wealth

Answer 17

• unanticipated inflation benefits borrowers, unanticipated deflation benefits lenders

Question 18

loss of purchasing power

Answer 18

• fixed income recipients

Question 19

transaction demand

Answer 19

• money held for day-to-day needs; influenced by price level, real GDP, interest rate

Question 20

speculative demand

Answer 20

• money held as an asset; decreased risk/increased opportunity vs. other assets