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Financial Assets
Written claims where buyers have the right income from sellers and physical assets. Allow the owner to get wealth over time.
Opportunity cost of holding money is the _______.
interest that the money could be earning
Liquidity
how fast an asset can be converted into cash
Bonds
When you get loans from the people, and give money after a certain time.
Price of bonds
interest rates effect the price of bonds
money
any asset accepted as payment
functions of money
medium of exchange, store of value, unit of account
unit of account
when money helps people sell prices, get a good idea of dif. goods and services.
medium of exchange
when money is used to purchase goods and services
store of value
saving money, changes the purchasing power because of inflation
M0 =
currency + bank reserves
M1
currency, demand deposits, traveler's checks, and other checkable deposits
Nominal interest rates
interest rates without inflation
Real interest rates
interest rates with inflation
Nominal interest rate =
inflation + real interest rate
when inflation is higher than anticipated what happens?
the real rate of return on the financial asset falls as well
borrows are ? from inflation.
better off; it's cheaper to pay off debt.
Bank liabilities
things the bank owes
Bank assets
the money a bank loans out
Reserve requirement
the percentage the bank has to keep in reserve. the rest is loaned out
Demand deposits
the money you give to the bank to store that you can take out any time.
All loans are given to other banks (what does this mean?)
when loans are made, people spend money. The person they spend money on then puts the money in their bank. So all loans are put into other banks.
When a consumer deposits money, there is a change to:
demand deposits, required reserves, amount of new loans.
Money Mult. =
1/Reserve Requirement Ratio
What is the cost of holding money?
The nominal interest rate is the cost of holding money
Demand in the Money Market Types
transactions demand, precautinary demand, asset or speculative demand
Transactions demand
wanting money to buy stuff
precautinary demand
money needed in case of unexpected cases
asset or speculative demand
using money as a way to hold wealth
Money supply is independent of what?
Nominal interest rates!
Shifters of Money Supply
monetary policy (federal reserve ==> change in reserve requirement)
Shifters of Money Demand
AG Price level, income, technology
Technology as a shifter of MD means?
online money avaliability
Monetary policy
When the central bank adjust nominal interest rates.
Who implements fiscal policy in the US?
Congress
Who implements monetary policy?
Federal Reserve
Monetary Policy (how do they adjust nominal interest rates?)
Call in loans, sell assets, borrow from other commercial banks OR Federal Funds rate
Federal Funds rate
When banks need money they can borrow from other banks or the central bank at specific rates
expansionary monetary policy
the decrease of nominal interest rate in the short run to help an economy get out of a recessionary gap (AD shifts right)
contractionary monetary policy
the increase of nominal interest rate in the short run to help an economy get out of a recessionary gap (AD shifts right)
recognition lag (monetary policy)
the time required for the Board of Governors to recognize that the economy is in trouble and needs a dose of expansionary or contractionary monetary policy
impact lag (monetary policy)
lag until the policy has its full impact on the economy
Open market operations
when fed sells or buys securities to control moneyh supply and interest rates
When fed buys bonds (Open market operations)
banks get money for bonds so they have excess cash, increased reserves which will increase Money supply and decrease interest rates
When fed sells bonds (Open market operations)
bank pays cash for bonds, so they have fewer reserves, which will decrease MS and increase interest rates.
Buying bonds =
bigger bucks
selling bonds =
smaller bucks
Federal funds rate
the int rate a bank charges another for short term loans
Lowering the fed funds rate (Federal funds rate)
makes borrowing cheaper so it boosts economic growth by making by lowering interest rates.
Increasing the fed funds rate (Federal funds rate)
makes borrowing expensive so it lowers economic growth by making by increasing interest rates.
Discount rate
interest rate banks pay to borrow from the fed.
decreasing the discount rate
gives banks more reserves, expanding the money supply
increasing the discount rate
gives banks less reserves, contracting the money supply
Required reserve ratio
percentage that banks must hold.
Lowering the required reserve ration
gives banks more reserves, expanding MS
Increasing the required reserve ration
gives banks less reserves, contracting MS
Demand for loanable funds
The amount of credit (loans) that borrowers want to take out at every interest rate
Demand for loanable funds has an inverse relationship with
with interest rate
Facts that shift demand for loanable funds
Foreign demand for domestic currency; All borrowing, lending and credit; Deficit spending; Expectation for the future (FADE)
Supply of loanable funds
the amount of money that lenders (like banks, investors, etc...) are willing to provide
Supply of loanable funds has a direct relationship with
interest rates
Factors that shift supply of loanable funds
Savings rate; expectations for the future; lending at discount window; foreign purchases of domestic assets, (SELF)
