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Unit 4 Flashcards

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1
Q

Financial Asset

A

An asset that a buyer has a paper claim to all future income earned from it

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2
Q

Liquidity

A

The ability for an asset to turn into cash to purchase goods and services

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3
Q

Bond Prices vs. Interest

A

Inverse relationship - higher bond prices, lower interest rates. Lower bond prices, higher interest rates

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4
Q

What happens to bond prices when the interest rate goes down?

A

They go up

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5
Q

What happens to bond prices if interest rates go up?

A

They go down

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6
Q

What happens if bond prices go up?

A

Interest rates go down.

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7
Q

What happens if bond prices go down?

A

Interest rates go up.

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8
Q

Opportunity Cost of Holding Money

A

The Interest Rate

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9
Q

Types of Assets

A

Cash, Stocks, Loans, Bonds, and Checking Accounts

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10
Q

Fisher Formula

A

Nominal = Real + Inflation

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11
Q

Higher than expected inflation helps ___ and hurts ___.

A

Borrowers, lenders

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12
Q

Lower than expected inflation helps ___ and hurts ___.

A

Lenders, borrowers

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13
Q

Fiat Money

A

Something that can ONLY be used as money (Cash, coins)

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14
Q

Commodity money

A

Something that can be used for money but has another non-monetary use (gold)

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15
Q

What conditions does something have to meet to be considered money?

A

Medium of Exchange, Unit of Account, and Store of Value

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16
Q

Medium of Exchange

A

Something that can be easily exchanged for goods and services, removes need for bartering

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17
Q

Unit of Account

A

Measures the value of something

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18
Q

Store of Value

A

It can hold / save purchasing power to be used later

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19
Q

M1

A

The most liquid forms of assets — Cash, Coins, Checking Accounts, Traveler’s Checks

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20
Q

M2

A

M1 + not as liquid things such as Deposits (Saving, Small Time, Money Market) and Money Market Mutual Funds

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21
Q
A
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21
Q

Money Supply

A

M1 + M2

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22
Q

Monetary Base (M0)

A

All the money in the economy or in bank reserves

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23
Q

How to find Monetary Base (M0)?

Study These Flashcards
A

Add the Money in Circulation and Money in Bank Reserves

24
How is money categorized?
Function, liquidity, and what is included
25
Fractional Reserve Banking
Banks save the required amount by law from a deposit and loan the rest, where it multiples and creates new money
26
Money Multiplier
1/Reserve Ratio
27
Required Reserves
The amount of money a bank is required to save by law
28
Excess Reserves
Additional money a bank is saving alongside the money they are required to save
29
Assets vs. Liabilities
Things people/institutions own and what they owe, Assets = Liabilities
30
Bank Balance Sheet: Liabilities
Demand Deposits (they have a reserve requirement), Savings Deposits, Other Liabilities (profit, bank debt, etc)
31
Fisher's Formula (Nominal, real, inflation)
I ≈ R + π
32
Money Market (Demand) Graph (list axes and direction)
X axis: Quantity of Money Demanded, Y axis: Nominal Interest Rate, Slopes downward
33
Why does the money market curve slope downward?
The higher the interest rate, the lower demand for money because people would rather have it in bonds so it accrues interest. The lower the interest rate, the higher demand for money because people would rather have their money on hand since it won't accrue much value
34
Liquidity Preference
Tradeoff between keeping money liquid (cash) or not (bonds)
35
Money Demand Shifters
Price Level, Real GDP, Technology, Regulations
36
Money Supply Curve (who deals with it? what is its shape?)
Set by the federal reserve. It is vertical, like LRAS
37
Central bank buys bonds and the money supply..
Goes up (shifts to the right) because it injects money into the economy
38
Central bank sells bonds and the money supply..
Goes down (shifts to the left) because it leaks money out of the economy
39
Monetary Policy
How governments change interest rates to reach full employment, stable prices, and economic growth
40
Scarce Reserve Methods
Open Market Operations, Discount Rate, Reserve Requirement
41
Open Market Operations
Buying or selling government bonds / securities
42
Discount Rate
The rate the Central Bank charges banks for overnight loans; penalty for not having enough reserves
43
Reserve Requirement
How much money a bank is required to save by law
44
What happens if a central bank buy or sell government bonds / securities? (money supply and interest rate)
Selling government securities leads to lower money supply and higher interest rate. Buying government securities increases money supply and decreases interest rate.
45
What happens if the discount rate is changed?
Higher rate: less money supply. Lower rate: more money supply
46
What if the reserve requirement is changed?
Higher reserve requirement decreases money supply and increases interest rates. Lower reserve requirement decreases money supply and increases interest rates.
47
Ample Reserves Graph (Shape + Axis)
Y axis is Policy Rate and X Axis is the Quantity of Reserves. Flat at the upper bound/discount rate, slopes down, then flat at the lower bound or interest on reserves rate
48
Ample Reserves Tools
Administered Rates (Discount and Interest on Reserves Rate, mainly Interest on Reserves rate used), Open Market Policies
49
Interest on Reserves Rate / IOR
Interest rate the central bank or other banks with ample reserves pay other banks for their reserves
50
Altering the discount rate... (on the Ample Reserve Graph)
increases the upper bound (increases it) or lowers it (decrease)
51
Altering the interest on reserves rate..
Moves it up (increases IOR rate) or down (decrease)
52
Federal Funds Rate
Policy Rate in the US
53
Disequilibrium
Money supply curve and money demand curve are not in equilibrium
54
Equilibrium
Money Supply Curve and Money Demand Curve are intersecting
55
Equilibrium Interest Rate
Interest Rate where the quantity demanded for money and money supply equal each other
56
Contractionary Policy (Scarce Reserves System)
Governments increase discount rate, reserve requirement, and sell bonds
57
Expansionary Policy (Scarce Reserves System)
Governments decrease discount rate, reserve requirement, and buy bonds
58
Expansionary and Contractionary Policy (Ample Reserves System)
Lowers administered rates to fight unemployment (Expansionary) or raises administered rates to fight inflation (contractionary)

ap macro (1 decks)

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