Questions and Answers
What is the main purpose of money?
Which of the following defines financial investment?
What happens to the demand for money as the interest rate increases?
How is nominal income measured?
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What are transaction costs primarily associated with?
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What does the term 'wealth' refer to?
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What is a characteristic of money market funds?
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What is the relationship between transaction level and nominal income?
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What characterizes aggregate demand in an economy?
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In what situation would aggregate demand increase according to the provided example?
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What does the Keynesian Cross model illustrate?
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How does the concept of the 'invisible hand' explain market behavior?
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What drives the IS-LM model?
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What defines aggregate supply within an economy?
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Which scenario would likely reduce aggregate supply?
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What is the purpose of bank reserves?
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What does the IS Curve represent in the context of Keynesian Economics?
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What outcome is likely when higher interest rates are implemented in an economy?
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How does the multiplier effect function in an economic context?
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What does liquidity preference primarily illustrate?
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In the IS-LM model, what does equilibrium determine?
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What does real income indicate?
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What occurs during an expansionary open market operation?
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What is meant by the term 'zero lower bound'?
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Which of the following describes financial intermediaries?
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What impact does a contractionary open market operation have?
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What does a central bank's balance sheet represent?
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What is the role of daily cash flow management?
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What is a liquidity trap?
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Study Notes
Financial Markets Overview
- Saving: Portion of after-tax income reserved rather than spent.
- Money: A liquid asset that facilitates transactions.
- Investment: Acquiring new capital goods like machinery and buildings; does not yield interest.
Types of Money
- Coins: Serve as mediums of exchange for goods and services.
- Checkable Deposits: Demand deposit accounts enabling check writing.
- Money Market Funds: Investment funds specializing in short-term, high-quality financial assets.
Wealth and Demand for Money
- Wealth: Total value of all owned assets.
- Demand for Money: Total monetary amount individuals and firms wish to hold for transactions.
- Bonds: Financial instruments that yield interest but are not used for transactions.
Income Definitions
- Nominal Income: Total income in current dollars, unadjusted for inflation.
- Real Income: Income adjusted for inflation, reflecting purchasing power.
- Equilibrium in Financial Markets: Achieved when money supply meets money demand, stabilizing the economy.
Banking and Monetary Operations
- Central Bank Balance Sheet: Displays the assets and liabilities of the central bank.
- Expansionary Open Market Operations: Central bank purchases bonds to increase money supply, raise bond prices, and lower interest rates.
- Contractionary Open Market Operations: Involves selling bonds to decrease money supply, which lowers bond prices and raises interest rates.
Financial Intermediaries and Liquidity
- Financial Intermediaries: Institutions pooling funds from individuals for investment or loans.
- Liquidity Trap: Occurs at the zero lower bound, rendering traditional monetary policy ineffective.
Aggregate Demand and Supply
- Aggregate Demand (AD): Total desired goods and services across households, businesses, and government at various price levels.
- Aggregate Supply (AS): Total amount of goods and services offered by producers at different price levels.
Keynesian Economics
- Invisible Hand: Concept that markets self-correct without government interference.
- Keynesian Cross: Model illustrating aggregate demand versus total output.
IS-LM Model
- IS Curve: Relates interest rates and output in the goods market, showing equilibrium where investment equals savings.
- LM Curve: Represents money market equilibrium.
- Equilibrium in IS-LM Model: Intersection of IS and LM curves determines economy's GDP and interest rate.
Economic Effects
- Multiplier Effect: Initial government spending cycles through the economy, boosting overall economic activity.
- Interest Rates and Economic Activity: Lower rates encourage borrowing and spending; higher rates hinder them, affecting overall demand.
General Concepts
- Liquidity Preference: Preference for holding cash rather than investing when interest rates are high.
- Transaction Costs: Costs linked to buying/selling bonds, influencing market dynamics.
Monetary Policies
- Regulatory Requirements: Central bank mandates that ensure banks maintain certain reserve levels.
- Loans: Money lent by banks to individuals and firms, significantly contributing to bank assets.
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Description
Explore key concepts in Financial Markets and the IS-LM Model through this quiz. This material is based on the University of the Philippines, Diliman Extension Program in Pampanga. Test your understanding of important economic principles and their applications.
