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Questions and Answers
What is saving?
What is saving?
The portion of after-tax income not spent on consumption.
Which of the following is considered a type of money? (Select all that apply)
Which of the following is considered a type of money? (Select all that apply)
What is investment?
What is investment?
The purchase of new capital goods that does not earn interest.
What does wealth refer to?
What does wealth refer to?
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What is nominal income?
What is nominal income?
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What happens during an expansionary open market operation?
What happens during an expansionary open market operation?
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The demand for money increases as the interest rate increases.
The demand for money increases as the interest rate increases.
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What are transaction costs in relation to bonds?
What are transaction costs in relation to bonds?
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What does the term 'real income' mean?
What does the term 'real income' mean?
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What is the zero lower bound?
What is the zero lower bound?
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Study Notes
Financial Market Concepts
- Saving is the portion of after-tax income not allocated to consumption.
- Money is a liquid asset utilized for transactions.
Types of Money
- Coins: Serve as a medium of exchange for goods and services.
- Checkable Deposits: Demand deposit accounts permit checks or drafts.
- Money Market Funds: Investment funds focused on short-term, high-quality financial assets.
Investment Categories
- Investment: Refers to purchasing new capital goods, such as machinery and buildings.
- Financial Investment: Involves acquiring financial assets, like stocks or bonds.
Demand for Money
- Represents the total amount individuals and firms want to hold for transactions.
- The demand for money decreases as interest rates rise.
Key Financial Measures
- Nominal Income: Total income measured in current dollars, excluding inflation adjustments.
- Real Income: Income adjusted for inflation, reflecting true purchasing power.
- Interest Rate: The percentage paid on bonds, essential for determining investment returns.
Financial Market Equilibrium
- Achieved when the supply of money matches the demand for money.
Important Market Operations
- Expansionary Open Market Operation: Central bank buys bonds, increasing money supply, elevating bond prices, and lowering interest rates.
- Contractionary Open Market Operation: Central bank sells bonds, reducing money supply, lowering bond prices, and raising interest rates.
Miscellaneous Concepts
- Transaction Costs: Costs incurred when buying or selling bonds, including broker fees.
- Transaction Level: Total volume of economic transactions, proportional to nominal income.
- Daily Cash Flow Management: Refers to overseeing the inflows and outflows of cash.
- Interbank Transactions: Settlements between banks involving asset transfers.
- Regulatory Requirements: Compliance with central bank-mandated reserve ratios.
Central Bank Functions
- Central Bank Balance Sheet: Captures the bank's assets (like bonds) and liabilities (money supply).
- Zero Lower Bound: Occurs when interest rates near zero, limiting monetary policy effectiveness.
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Description
This quiz covers essential concepts in financial markets and the IS-LM model, focusing on saving, money dynamics, and their implications in economic theory. Perfect for students in the Econ 101 course at the University of the Philippines, Diliman.
