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Macroeconomics > Chapter 12 > Flashcards

Chapter 12 Flashcards

(48 cards)

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1
Q

What are the 2 categories of financial wealth?

A

Money and bonds

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2
Q

What is money?

A

It is all assets that serve as a medium of exchange - paper money, coins, and bank deposits that can be transferred on demand by cheque or electronic means

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3
Q

What are bonds?

A

They are all other forms of financial wealth, which includes interest-earning financial assets and ownership shares in firms

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4
Q

What does present value equal to?

A

It equals to discounted present value

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5
Q

What does a higher market interest rate lead to?

A

It leads to a lower present value

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6
Q

What is present value?

A

It is the value now of one or more payments or receipts made in the future

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7
Q

What is the equation for present value (PV)?

A

PV = Rt/(1+i)^t

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8
Q

What is the present value of any bond that promises one or more future payments is negatively related to?

A

It is negatively related to the market interest rate

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9
Q

What is the present value of a bond?

A

It is the most someone is willing to pay now to own the bond’s future stream of payments

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10
Q

What is the equilibrium market price of any bond?

A

It is the present value of the income stream that it produces

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11
Q

What does an increase in the market interest rate lead to?

A

It leads to a fall in the price of any given bond

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12
Q

What does a decrease in the market interest rate lead to?

A

It leads to an increase in the price of any given bond

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13
Q

What is the cost of investment of a bond equal to? What is the return on this investment equal to?

A

Cost of investment = price of the bond
Return on the investment = sequence of future payments

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14
Q

For any given sequence of future payments, a lower bond price implies what?

A

A higher rate of return on the bond, or a higher bond yield

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15
Q

Do market interest rates and bond yields tend to move together?

A

Yes they do

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16
Q

What does an increase in the riskiness of any bond lead to?

A

It leads to a decline in its expected present value and a decline in the bond’s price so the lower bond price implies a higher bond yield

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17
Q

What the demand for money?

A

It is the amount of money that everyone collectively wants to hold at any time

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18
Q

Why do firms and households hold money?

A
  1. Transactions demand for money
  2. Precautionary demand for money
  3. Speculative demand for money
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19
Q

What is the amount of money demanded influenced by?

A

It is influenced by interest rates, real GDP, and the price level

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20
Q

What is the demand for money assumed to be negatively related to?

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A

The interest rate

21
Q

What is the demand for money assumed to be positively related to?

22
Q

What is the demand for money assumed to be positively related to?

23
Q

What does a decrease in the interest rate lead to?

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A

A decrease in the opportunity cost of holding money

24
Q

What are movements along the MD curve cause by?

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A

By the substitution of assets between money and bonds

25
What does an increase in real GDP or increase in price level do to the money demand curve?
It shifts it to the right
26
What does an increase in the interest rate increase?
It increases the opportunity cost of holding money and leads to a reduction in the quantity of money demanded
27
What does an increase in real GDP increase?
It increases the volume of transactions and leads to an increase in the quantity of money demanded
28
What does an increase in the price level increase?
It increases the dollar value of a given volume of transactions and leads to an increase in the quantity of money demanded
29
Why is money supply vertical?
Because it is a stock variable
30
What are the 3 things that the money transmission mechanism describes?
1. Changes in the demand for money or the supply of money cause a change in the equilibrium interest rate in the short run. 2. The change in the equilibrium interest rate leads to a change in desired investment and consumption expenditure (and net exports in an open economy). 3. The change in desired aggregate expenditure leads to a shift in the AD curve and to short-run changes in real GDP and the price level.
31
What does an increase in the money supply reduce?
It reduces the equilibrium interest rate
32
What does an increase in the demand for money increase?
It increases the equilibrium interest rate
33
What does an increase in the supply of money do to the interest rate?
It makes it fall in the short run
34
What does an increase in the demand for money do to the interest rate?
It makes the interest rate increase in the short run
35
In an open economy, if there is an increase in Canadian money supply what happens to Canada's interest rates?
They decrease which leads to an outflow of financial capital
36
What does capital outflow do?
It makes the Canadian dollar depreciate
37
What happens when there is an increase in the money supply in an open economy with capital mobiltiy?
The aggregate demand increased for 2 reasons: 1. decrease in interest rates increases investment 2. there is a lower interest rate which leads to capital outflow and currency depreciation, which increases net exports
38
What does a rise in the price level raise?
It raises the money value of transactions and leads to an increase in the demand for money
39
What does the long-run money neutrality describe?
That Y* is unaffected by changes in money supply
40
What does money neutrality tell us in the long-run if money supply increases?
That the price level will increase but potential output does not change
41
What is the Hysteresis Effect?
It is possibility that the short-run path of GDP may have an influence on Y
42
Why is there the possibility that GDP may have an influence on Y?
Because a change in the money supply, through its effect on the interest rate, can affect investment and technological change In a long period of unemployment, workers can lose human capital, which can affect Y* and its growth rate
43
Is money neutral in the short run?
No it is not
44
What is the ability of monetary policy to induce short-run changes in real GDP dependent on?
It is dependent on the slopes of the money demand and investment demand curves
45
When is monetary policy effective in correspondence with the money demand and investment demand curves?
The steeper the money demand curve and the flatter the investment demand curve the more effective is monetary policy
46
What did Keynesians ague about monetary [olicy?
That it was not very effective as the MD curve was relatively flat and the ID curve was relatively steep
47
What did the Monetarists argue about monetary policy?
That it was very effective as the MD curve was relatively steep and the ID curve was relatively flat
48
What does empirical research suggest about money demand?
That is is relatively insensitive to changes in the interest rate The MD curve is quite steep and, as a result, changes in the money supply cause relatively large changes in interest rates Though the ID curve is downward sloping, there is no consensus on wether the curve is steep or flat

Macroeconomics (14 decks)

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