Unit 4

• Financial assets

  Assets that represent a claim on future income or wealth
• Types of financial assets

  • Stocks
  • Bonds
  • Money
• Bonds

  Certificates that give the owner the right to be paid back for a loan to a business or the government
• Measures of money supply

  • M0 (monetary base)
  • M1
  • M2
• Unexpected inflation can help borrowers and hurt lenders
• Required reserves

  Percentage of checkable deposits set by the Federal Reserve
• Excess reserves

  Funds the bank has available to loan out
• The money multiplier is the inverse of the reserve requirement percentage
• Increase in customer deposits

  Increases bank's total reserves, required reserves, and excess reserves
• Demand curve shifts right

  Increase in demand
• Demand curve shifts left

  Decrease in demand
• Central bank increases money supply

  Money supply curve shifts right
• Central bank decreases money supply

  Money supply curve shifts left
• Equilibrium nominal interest rate and quantity of money

  Determined by intersection of money demand and money supply curves
• Central bank open market purchase of $10 million


  Money multiplier of 10, $90 million of new loans, $100 million of new deposits, $100 million of new money
• Reserves market in ample reserves


  Changes in reserves supply do not impact policy rate
• Expansionary monetary policy (scarce reserves)


  Buy bonds, lower discount rate, lower reserve requirement to decrease nominal interest rate and increase investment
• Increase in government deficit

  Increases interest rates and reduces gross investment (crowding out)
• Decrease in government deficit

  Decreases interest rates and increases gross investment