economics- module 13
assume initially that market interest rates are 7% and the bondholder is receiving a $70 coupon payment per year on a bond with a face value of $1000. If market interest rates RISE to 8% the BOND PRICE:
$70/.08 = 875. falls to $875
the twin goals of monetary policy
1 economic growth and full employment 2 stable prices and moderate long-term interest rates
summit deposits $1500 cash into his checking account. the reserve requirement ratio is 25% What is the change in his bank's EXCESS RESERVES?
1. 1500 x .25= 375 2. 1500-375= $1125
causes of money leakages
1. banks choosing to hold excess reserves 2. individuals and businesses holding money in cash 3. cash held by foreign consumers, businesses, and governments
financial institutions fulfill 3 important roles that facilitate the flow of funds to the economy
1. reducing information costs 2. reducing transaction costs 3. diversifying assets to reduce risk
the 3 main tools of monetary policy
1. reserve requirements 2. discount rate 3. open market operations
if the reserve requirement ration is 20%, the MONEY MULTIPLIER is
1/.20= 5
assume the reserve requirement is 10% and all banks are fully loaned up. if a new deposit of $10,000 is made into bank x, with this deposit bank x can make new loans of:
10,000 x 10= 1,000 required reserves 10,000-1,000= 9,000 excess reserves
what is the YIELD on a bond sold for $1850 and paying $25.50 in interest annually?
25.50/1850 X 100= 1.38%
in the equation of exchange, if M= $2 trillion, P= 1.5, and Q= $8 trillion:
M X V= P X Q 2 X V= 1.5 X 8 V= 1.5 X 8 / 2=6 ANSWER= the velocity of money (V) =6
Using the equation of exchange, if the money supply is $4 trillion, the price level is 2, and the level of output (real GDP) is $6 trillion, then the velocity of money is ___.
M x V= P x Q 4XV= 2X6 V= 12/4 = 3
the equation of exchange
MV=PQ m= the supply of money v= velocity of money (avg money is spent in a year) p= price level q= the economy's real output level
which of the following is the least liquid?
Picasso painting
figure: market for loanable funds. if households decide to save a larger portion of their income bc they fear job loss due to a recession, the loanable funds supply curve will shift from ___ to___, and the new equilibrium will be at point ___, holding demand constant at D0.
S0; S1; b
which of the following will cause the supply of loanable funds curve to shift leftward?
an increase in the government deficits
in a ____ system, goods and services are traded directly
barter
Milton Friedman
believed monetary policy will work in the short run; approach is know as monetarism.
most loanable funds are in the form of _____
bonds
m1 includes
cash, demand deposits, and other checkable deposits
in the short run, changes in the money supply will NOT change output according to:
classical economists
bond contracts include
coupon rate maturity date of the bond face value of then bond (the value at maturity)
____ constitutes about half of m1 ____ _____ makes up the other half of m1
currency; checking accounts
in times of economic downturn the fed will engage in _______ monetary policy by _______ bonds
expansionary; buying
higher interest rates will cause bond prices to ____
fall
the ____ ____ ___ ____ oversees open market operations, the main tool of monetary policy
federal open market committee
our current financial system uses ___ ___
fiat money
institutions that acquire funds from savers and then lend those funds to borrowers are called:
financial intermediaries
which of the following is NOT a policy tool of the federal reserve?
fiscal policy
velocity; V is output; Q is
fixed
in counteracting a negative supply shock, the fed could achieve ___ by using ___ monetary policy
full employment but not price stability; expanisonary
_____ and ____ _____ ____ are the least liquid b/c they require more effort to convert to money
houses and other physical assets
monetary policies in the long run will create
inflation
a ____ is the departure of money from the lending cycle b/c of an action taken by a bank, an individual, or a business
leakage
money is often used as a store of wealth b/c it has such a high level of ____
liquidity
primary functions of money
medium of exchange, unit of account, store of value
in the long run, what is not efficient?
monetary policy
expansionary monetary policy
monetary policy that increases aggregate demand
contractionary monetary policy
monetary policy that reduces aggregate demand
the _____ measures the max amt the money supply can increase when new deposits enter the system
money multiplier
the main tool of monetary policy is
open market operations
bond prices and interest rates move in ______ directions
opposite
the supply of loanable funds is _______ ________ to the interest rate
positively related
anything that changes the ___ __ ___ __ ____ _________ will cause the demand for loanable funds to change: investment tax incentives technological advances regulations product demand business expectations
rate of return on potential investment
banks hold a percentage of their total deposits as ____
reserves; the rest goes to loans
if the fed wants to raise the interest rate, it will _____ bonds, which _____ bond prices
sell; lowers
_____, _____, _____ _____ are less liquid than money b/c they must be converted to money
stocks, bonds, and precious metals
If there is a general rise in fear of the financial system:
the actual multiplier will fall
when the long-run aggregate supply curve is drawn as a vertical line; the theorist is assuming that:
the economy tends to full employment in the long run
John Maynard keynes
thought that an expansionary monetary policy could create more activity for a healthy economy in the short run as long as there's no deep recession/ depression.
increase in money supply; M
will have an increase in price; P
a shift in the supply curve of loanable funds occurs when a factor increases or decreases the country's ____ __ _____ at any given rate: economic outlook incentives to save income or asset prices gov deficits
willingness to save
