Econ 203_Chap.12 Flashcards
(34 cards)
What are the two main categories of financial wealth?
Money and bonds.
What is included in the category of ‘money’?
Assets that serve as a medium of exchange, such as paper money, coins, and bank deposits that can be transferred on demand.
What is included in the category of ‘bonds’?
All other forms of financial wealth, including interest-earning financial assets and ownership shares in firms.
What is present value (PV)?
The discounted present value of future payments.
How is the present value of a single payment calculated?
PV = R1 / (1 + i), where R1 is the amount received one year from now and i is the annual interest rate.
What is the relationship between the market interest rate and the present value of a bond?
The present value of a bond is negatively related to the market interest rate.
How is the present value of a sequence of future payments calculated?
PV = R1 / (1 + i) + R2 / (1 + i)^2 + … + RT / (1 + i)^T, where R represents the payments and i is the interest rate.
What is the equilibrium market price of a bond?
The present value of the income stream that it produces.
What happens to the price of a bond when the market interest rate increases?
The price of the bond falls.
What is a bond yield?
The rate of return on the bond investment.
How are market interest rates and bond yields related?
They tend to move together.
How does an increase in the riskiness of a bond affect its price and yield?
An increase in riskiness leads to a decline in the bond’s price and an increase in the bond’s yield.
What is the demand for money?
The amount of money that everyone (collectively) wants to hold at any time.
What are the three reasons why firms and households hold money?
Transactions demand, precautionary demand, and speculative demand.
What three factors influence the amount of money demanded?
Interest rates, real GDP, and the price level.
How is the demand for money related to the interest rate?
Negatively related.
How is the demand for money related to real GDP?
Positively related.
How is the demand for money related to the price level?
Positively related.
What is the effect of an increase in the interest rate on the quantity of money demanded?
It leads to a reduction in the quantity of money demanded.
What is the effect of an increase in real GDP on the quantity of money demanded?
It leads to an increase in the quantity of money demanded.
What is the effect of an increase in the price level on the quantity of money demanded?
It leads to an increase in the quantity of money demanded.
What causes a change in the equilibrium interest rate in the short run?
Changes in the demand for money or the supply of money.
What does the change in the equilibrium interest rate lead to?
A change in desired investment and consumption expenditure.
What does the change in desired aggregate expenditure lead to?
A shift in the AD curve and to short-run changes in real GDP and the price level.
