INTB 336 Chapter Notes - Chapter 4: Shortage, Time Deposit, Money Market
26 May 2017
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Chapter 4- money, interest rates and exchange rates. Liquid and illiquid assets: monetary assets (liquid assets), non-monetary (illiquid assets): bonds, loans, deposits of currency in the foreign exchange market, stocks, real estate and other assets. Money supply: the central bank substantially controls the quantity of money that circulates in an economy, the money supply. In the u. s. , the central banking system is the federal reserve system. Individuals base their demand for an asset on three characteristics: expected return the asset offers compared with returns offered by other assets, riskiness of the asset"s expected return, asset"s liquidity. Households and firms hold money only because of its liquidity. Increase in the interest rate rise in the rate of return on less liquid assets relative to return on money conclusion: individuals want to hold more wealth in non-money assets that pay the market interest rate. All else equal, rise in interest rate causes demand for money to fall.
