ECON 1102 Chapter Notes - Chapter 15: Aggregate Demand, Real Interest Rate, Taylor Rule

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4 Apr 2016

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Chapter 15: interest rates and the monetary policy. 5. 1 the market for money and determination of interest rates. Transactions demand (dt): demand for money as a medium of exchange, varies with. Asset demand (da): demand for money as a store of value, varies with the interest rate. Asset demand (dm): the horizontal summation of the asset demand and transaction demand. Interest rate: the price paid for the use of money. Equilibrium interest rate: demand for money combined with the supply of money determines the equilibrium rate of interest. Interest rates and bond prices: when the interest rate increases, bond prices fall; and vice versa. ex: a bond pays interest. Interest yield on this bond is 5% (50/1000) Interest rate rises to 7. 5%: bond prices will fall to . (50/7. 5%) Interest rate falls to 2. 5%: bond price will rise to . (50/2. 5%) 5. 2 functions of the bank of canada: acting as the bankers bank .

Related Questions

Which of the following is correct?

a. The asset demand for money is downsloping because the opportunity cost of holding money declines as the interest rate declines.

b. The asset demand for money is downsloping because bond prices and interest rates are directly related.

c. The transaction demand for money is downsloping because the opportunity cost of holding money varies inversely with the interest rates.

d. The asset demand for money is downsloping because the opportunity cost of holding money increases as the interest rate rises.

bronzeeel636

1. The opportunity cost of money is

a) growth rate of prices.

b) real GDP.

c) interest rate.

d) none of the above

2. Household wealth affects the equilibrium yield on bonds due to its impact on

a) the supply of bonds

b) the demand for bonds.

c) inflation has no effect on bond yields.

d) the supply and demand for bonds.

3. A bank takes deposits and uses the funds to make home loans. Hence, the _____ increases.

a) level of capital

b) ROA

c) quantity of reserves

d) none of the above

4. A decrease in the government budget deficit causes the _____ bonds to shift and equilibrium interest rates to _____.

a) demand for, rise

b) supply of, rise

c) demand for, fall

d) supply of, fall

5.The yield on a one-year bond is currently 4% and the expected yield on one-year bonds for the next two years is 5% and 6%. If the liquidity premium is 0.5%, what is the yield on a bond with two years to maturity?

a) 5.5%

b) 5%

c) 6%

d) 4.5%

6. The too big to fail policy exacerbates the moral hazard problem between:

a) banks and borrowers.

b) regulators and banks

c) politicians and regulators

d) the public and politicians.

7. ARMs

a) force lenders to assume interest rate risk

b) became more prevalent during the Great Inflation.

c) both of the above.

d) neither of the above

8. Which of the following types of money are not self-equilibrating?

a) commodity

b) representative

c) all are self-equilibrating

d) fiat

9. Technology has helped to make possible which of the following innovations?

a) ATM

b) credit cards

c) mortgage-backed securities

d) all of the above

10. All of the following EXCEPT one would have a strong propensity to initiate a financial crisis. Which is the exception?

a) banking panics

b) government fiscal deficits

c) exchange rate appreciation

d) increases in interest rates

amethystyellowjacket106

13. As we observed in this chapter, central banks, rather than purposefully setting the level of the money supply, usually set a target level for a short-term interest rate by standing ready to lend or borrow whatever money people wish to hold at that interest rate. (When people need more money for a reason other than a change in $4,010 $570.3 $641.0 CHAPTER 15 Money, Interest Rates, and Exchange Rates 383 the interest rate, the money supply therefore expands, and it contracts when they wish to hold less.) a. Describe the problems that might arise if a central bank sets monetary policy by holding the market interest rate constant. (First, consider the flexible-price case, and ask yourself if you can find a unique equilibrium price level when the central bank simply gives people all the money they wish to hold at the pegged interest rate. Then consider the sticky-price case.) b. Does the situation change if the central bank raises the interest rate when prices are high, according to a formula such as where a is a positive constant and a target price level? c. Suppose the central bankâs policy rule is where u is a random movement in the policy interest rate. In the overshooting model shown in Figure 15-12, describe how the economy would adjust to a permanent one-time unexpected fall in the random factor u, and say why. You can interpret the fall in u as an interest rate cut by the central bank, and therefore as an expansionary monetary action. Compare your story with the one depicted in Figure 15-13. Figure 15-12: http://gyazo.com/3d32377d42b5c9584e17b3c5e40aafaa

Figure 15-13: http://gyazo.com/1fa467e253e320f61da17532fa8d2b58

ECON 1102 Chapter Notes - Chapter 15: Aggregate Demand, Real Interest Rate, Taylor Rule

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