Econ 101 Financial Markets & IS-LM Model

Questions and Answers

The portion of after-tax income not spent on consumption.

Bonds

Investment in stocks

Checkable Deposits (correct)

Coins (correct)

The purchase of new capital goods that does not earn interest.

The total value of all assets owned by an individual. Signup and view all the answers

Total income measured in current dollars, without adjusting for inflation. Signup and view all the answers

Bond prices rise Signup and view all the answers

False Signup and view all the answers

The costs associated with buying or selling bonds, such as broker fees. Signup and view all the answers

Income adjusted for inflation, measuring the purchasing power of income. Signup and view all the answers

The situation where interest rates approach zero and cannot be lowered further. Signup and view all the answers

Study Notes

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: Refers to purchasing new capital goods, such as machinery and buildings.
Financial Investment: Involves acquiring financial assets, like stocks or bonds.

Represents the total amount individuals and firms want to hold for transactions.
The demand for money decreases as interest rates rise.

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.

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.

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 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.