Macroeconomics Unit 4

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)