Economics Chapter 28
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An increase in real GDP increases the volume of transactions in the economy and is assumed to cause an increase in desired money holding
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An increase in the Canadian money supply reduces Canadian interest rates and leads to a capital outflow. This outflow of financial capital causes the Canadian dollar to depreciate.
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An increase in the market interest rate leads to a fall in the price of any given bond. A decrease in the market interest rate leads to an increase in the price of any given bond.
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An increase in the market interest rate will reduce bond prices and increase bond yields. A reduction in the market interest rate will increase bond prices and reduce bond yields. Therefore, market interest rates and bond yields tend to move together
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An increase in the money supply causes a reduction in the interest rate and an increase in desired investment and other interest sensitive expenditure; it therefore causes a rightward shift of the AD curve. A decrease in the money supply causes an increase in the interest rate and a decrease in desired investment; it therefore causes a leftward shift of the AD curve.
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An increase in the price level is assumed to cause an increase in desired money holdings.
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An increase in the riskiness of any bond leads to a decline in its expected present value and thus to a decline in the bond's price. The lower bond price implies a larger bond yield.
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Changes in either the demand for or the supply of money cause changes in the equilibrium interest rate
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In an open economy with capital mobility, an increase in the money supply results in an increase in aggregate demand for two reasons. First, the reduction in interest rates causes an increase in investment. Second, the lower interest rate causes a capital outflow, a currency of depreciation, and a rise in net exports.
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Many modern economists believe that money is neutral in the long run. Long-run neutrality implies that, in the absence of other shocks to the economy, changes in money and changes in the price level are closely linked over long periods of time.
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Monetary equilibrium occurs when the interest rate is such that the quantity of money demanded equals the quantity of money supplied
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Other things being equal, the demand for money is assumed to be negatively related to the interest rate
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The Classical economists emphasized the economy's long-run equilibrium. In their view, changes in the supply of money had no effect on real GDP or other real variables; the only effect was to change the price level.
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The effectiveness of monetary policy in inducing short-run changes in real GDP depends on the slopes of the MD and ID curves. The steeper is the MD curve, and the flatter is the ID curve, the more effective is monetary policy.
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The equilibrium market price of any bond will be the present value of the income stream that it produces.
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The present value of a bond is the most someone would be willing to pay now to own the bond's future stream of payments
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The present value of any bond that promises a future payment or sequence of future payments is negatively related to the market interest rate