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Macroeconomics > WEEK 9 > Flashcards

WEEK 9 Flashcards

1
Q

opportunity cost of holding cash =?

A

interest income that would be collected if that spending power were in an interest-bearing asset (e.g. bond)

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2
Q

short term interest rate

A

interest rates on financial assets that mature within 6 months or less

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3
Q

long term interest rate

A

interest rates on financial assets that mature a number of years in the future

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4
Q

money demand curve

A

relationship between the quantity of money and the nominal interest rate

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5
Q

shifts in money demand curve

A
  • changes in APL (increase APL, increased money demand because need more money to buy goods)
  • changes in real GDP (increase real GDP, increase money demand because more consumption requires more money)
  • changes in money technology (e.g. credit cards) (increase in money tech, decrease in money demand because don’t hold in cash)
  • changes in intstitutions (e.g. after 1980 banks were allowed to offer interest on checking accounts which decreased the cost of holding money and therefore increased money demand)
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6
Q

liquidity preference model of interest rate

A

asserts that interest rate is determined by money demand and money supply

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7
Q

money demand and supply graph

A
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8
Q

what happens when the IR is…

  1. higher than equilibrium
  2. lower than equilibrium?
A
  1. at a higher IR, S>D, surplus of money and a shortage of other assets (e.g. bonds), investors selling bonds will realise they can reduce IR and still find buyers
  2. at a lower IR, D>S, shortage of money and surplus of other assets (e.g. bonds), investors selling bonds will try to make them more attractive to buys by raising IR
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9
Q

target federal funds rate

A

Fed’s desired federal funds rate

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10
Q

how does the Fed set the IR?

A
  • through open market operations
  • e.g. buy purchasing T-bills, IR decreases
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11
Q

what is the effect of improved transaction technology on…

  1. money demand
  2. money supply
  3. interest rate
  4. quantity of money?
A
  1. shifts left
  2. movement
  3. decreased
  4. unchanged
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12
Q

what is the effect of decreased real GDP and then Fed purchasing T-bills on…

  1. money demand
  2. money supply
  3. interest rate
  4. quantity of money?
A
  1. shifts left when real GDP decreases
  2. shifts right when Fed purchases T-bills
  3. decreases
  4. increases
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13
Q

what is the effect of the Fed purchasing T-bills on…

  1. money demand
  2. money supply
  3. interest rate
  4. quantity of money?
A
  1. shifts right
  2. movement
  3. decrease
  4. increase
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14
Q

what is the effect of an increase in real GDP on…

  • money demand
  • money supply
  • interest rate
  • quantity of money?
A
  1. shifts right
  2. movement
  3. increase
  4. unchanged
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15
Q

what is the effect of increased APL on…

  1. money demand
  2. money supply
  3. interest rate
  4. quantity of money?
A
  1. shift right
  2. movement
  3. increased
  4. unchanged
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16
Q

do long term IR necessarily move with short term IR?

A
  • no
  • if investors expect STIR to increase, will buy STIR
  • LTIR reflects market’s average expectation for STIR
17
Q

expansionary monetary policy

A

monetary policy which increases AD (aka ‘easy money policy’)

Federal reserve can:

  • decrease discount rate
  • decreased required reserves
  • buy T-bills
  1. increase money supply
  2. decrease IR
  3. increase investment spending which increases incomes
  4. increases consumer spending via the multiplier
  5. increases AD
18
Q

contractionary monetary policy

A

monetary policy which decreases AD (aka ‘tight money policy’)

Federal reserve can:

  • increase discount rate
  • increase required reserves
  • sell T-bills
  1. decrease money supply
  2. increase IR
  3. decrease investment spending which decreases incomes
  4. decrease consumer spending via the multiplier
  5. decrease AD
19
Q

how does a Central Bank decide whether to use expansionary or contractionary monetary policy?

A

policy makers try to:

  • fight recessions
  • ensure price stability, i.e. low inflation

usually combo of these goals

20
Q

federal funds rate tends to…

A
  • rise when there is a positive output gap
  • fall when there is a negative output gap
  • be high when inflation is high
  • be low when inflation is low
21
Q

why do changes to money supply affect APL but not output in the long run?

A
  • increase in money supply reduces IR and increases AD
  • eventual rise in nominal wages leads to decrease in SRAS so aggregate output falls back to potential output
22
Q

money neutrality

A

changes in money supply have no real effect on the economy

23
Q

why do changes in the money supply not affect IR in the long run?

A
  • increase in money supply decreases interest rate in the short run
  • in the long run increase in APL leads to increase in money demand so IR returns to original level
24
Q

what is the effect of depositing money from the sale of stocks into a checking account?

A

M1/M2 increases because checking account is a part of M1 (and therefore m@)

Macroeconomics (11 decks)

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