Lecture 5 Flashcards
(13 cards)
1
Q
Money supply primarily determined by
A
- Central banks reserves
- Bank’s policies
- Consumers deposits in banks
2
Q
What is the price of money in the money market anyway ?
A
Interest rate
3
Q
What is the price P?
A
- Amount of money I have to pay for a certain good or service
- When there’s more money in equilibrium P is high
- When there’s less money in equilibrium P is low
4
Q
Money demand depends on:
A
- Your money demand will depend on the nominal interest rate
- The price of money is the forgone opportunity cost which is the nominal interest rate
5
Q
No arbitrage
A
Investors cannot make more from buying more of one asset or another
6
Q
Fisher Equation
A
- Nominal rate = Real rate + inflation rate
- Fisher equation tells us is that the expected inflation rate will affect nominal rates for 1 for 1 (Fisher effect)
7
Q
Ex ante
A
Expected return
8
Q
Ex post
A
Realised return
9
Q
Cost of Inflation
A
If ex ante and ex post interest rates differ there is an inflation driven redistribution from creditors to debtors
10
Q
If unexpected inflation is positive for example:
A
- Even if the borrower pays back in full lenders cannot buy as many things as they planned
- While borrowers can buy more things than they planned for even after paying back in full
11
Q
Why do people hold money?
A
- To make transactions
- If we hold all wealth in money: lose interest but have to go to the bank less frequently
- If we hold all wealth in bonds don’t lose interest but have to run to bank all the time
12
Q
Supply side economics
A
- Money has no effect on output (money neutrality)
- Only affects prices
- So prices rise if CB increases supply of money compared to LRAS
- Equilibrium interest rate becomes higher
- However interest rate determined in financial market in the LR
13
Q
LR and SR
A
- In the LR the financial markets equilibrium determines r* so the money market only determines P*
- In the SR we use the IS-MP model to determine r*
- MP: money market equilibrium curve and SRAS determines prices
