Cornell, ECON 3310

Excerpt: ... Measuring Interest Rates Yield on a Discount Basis Interest Rates and Returns Real and Nominal Interest Rates Last Lecture: Money is everything generally accepted as payment Medium of exchange, unit of account, store of value Evolution of the payments system Monetary aggregates Money measures are linked to economic activity, ination and interest rates Measuring Interest Rates Yield on a Discount Basis Interest Rates and Returns Real and Nominal Interest Rates CHAPTER 4 Understanding Interest Rates Measuring Interest Rates Yield on a Discount Basis Interest Rates and Returns Real and Nominal Interest Rates Present (Discounted) Value A dollar paid to you one year from now is less valuable than a dollar paid to you today. You can invest a dollar today and earn an interest rate in one year. Dierent debt instruments have very dierent streams of cash payments (cash ows). We can compare the value of these instruments by looking at their present value. Measuring Interest Rates Yield o ...

Rollins, ECO 503

Excerpt: ... Inflation Why study inflation? distinction between average prices and relative prices understand behavior and likely future direction of inflation Questions to consider Why are there different ways of estimating inflation? What are some problems caused by inflation? inflation: percentage change in a price index price index: average level of prices of a set of goods & services 1. consumer price index (CPI) 2. personal consumption expenditure (PCE) index 3. many others note: overall vs. core inflation core excludes food & energy which are volatile in the short term Inflation & Interest Rates real vs. nominal interest rates nominal interest rates increase with inflation more on interest rates later ...

East Los Angeles College, EC 368

Excerpt: ... EC368 International Money and Finance Price levels and exchange rates in the long run Dr. Aris Kartsaklas akarts@essex.ac.uk Answers to Problem set 5 Spring Term 2008/2009 1 Problem set 5 Questions 1. Other things equal, how would you expect the fo ...

Rutgers, ECONOMICS 103

Excerpt: ... are, as you might expect, the reverse of the effects of expected inflation: deflation leads to lower nominal interest rates and to increased demand for money. There is, however, a limit to the effect of expected deflation on nominal interest rates . Look back at the example in Figure 16-3, where the equilibrium nominal interest rate is 4% if the expected inflation rate is 0%. Clearly, if the expected inflation rate is -3%-if the public expects deflation at 3% per year-the equilibrium nominal interest rate will be 1%. But what would happen if the expected rate of inflation is -5%? Would the nominal interest rate fall to -1%? No. Nobody would lend money at a negative nominal rate of interest because they could do better by simply holding cash. Economists say that there is a zero bound on the nominal interest rate: it cannot go below zero. This zero bound can limit the effectiveness of monetary policy. Suppose the economy is depressed, with output below potential output and the unemployment rate above the natur ...

Baylor, ECO 3307

Excerpt: ... Mankiw, Chapter 4 Study Questions 1. A foreign exchange market is a market in which the currency of one country is traded for the currency of another country. In the dollar-yen market, for example, Japense yen are exchanged for U.S. dollars. Sellers of yen are buyers of dollars, and buyers of yen are sellers of dollars. In the early months of this year the dollar lost value against the yen. In response, the Federal Reserve purchased dollars (and sold yen) in the open market to keep the dollar from losing even more value. Other things equal, what was the effect of this foreign exchange market intervention on the U.S. money supply? 2. Suppose that during the 1980s the average nominal interest rate on loans of a particular kind was 8% in the United States and 75% in Argentina. What is the most likely cause of this large difference in nominal interest rates ? Explain. 3. In the 16th century, gold was the main kind of money in much of Western Europe. Spanish explorers discovered gold in South America and transport ...

Michigan, ECON 402

Excerpt: ... PS 6 Two Canonical Models (60 raw points) ECON 402, Prof. Bachmann Due: March 10 Explain all your answers. Results only means partial credit only. Staple and write legibly. No spiral stuff. Write on the top of the front page of the assignment you h ...

Purdue, ECON 371

Excerpt: ... Econ 371: Answer Key for Problem Set 3 (Chapter 15) Instructor: Kanda Naknoi March 3, 2005 Note: These are true-false questions. Although the problem set did not require you to explain your reasons, it is important to verify them with the answer key. ...

Wisc Whitewater, ECON 354

Excerpt: ... This one-for-one relationship is called the Fisher effect. Note: These lecture notes are incomplete without having attended lectures. percent per year 15 Inflation and nominal interest rates in the U.S., 1955-2006 nominal interest rate 10 5 0 inflation rate -5 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 Note: These lecture notes are incomplete without having attended lectures. Inflation and nominal interest rates across countries Nominal 100 Interest Rate (percent, logarithmic scale) Romania Zimbabwe Brazil Bulgaria 10 Israel Germany Switzerland U.S. 1 0.1 1 10 100 1000 Inflation Rate (percent, logarithmic scale) Note: These lecture notes are incomplete without having attended lectures. Exercise 3: An Application of the Quantity Theory and the Fisher Effect Consider the Quantity Theory Equation we studied in the previous lecture: MV = PY Suppose V is constant, M is growing 5% per year, Y is growing 2% per year, and r = 4. a. Solve for i. b. If the Fed increases the money growth r ...

Wisc Whitewater, ECON 354

Excerpt: ... nflation and nominal interest rates in the U.S., 1955-2006 nominal interest rate 10 5 0 inflation rate -5 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 Note: These lecture notes are incomplete without having attended lectures. Inflation and nominal interest rates across countries Nominal 100 Interest Rate (percent, logarithmic scale) Romania Zimbabwe Brazil Bulgaria 10 Israel Germany Switzerland U.S. 1 0.1 1 10 100 1000 Inflation Rate (percent, logarithmic scale) Note: These lecture notes are incomplete without having attended lectures. Exercise 3: An Application of the Quantity Theory and the Fisher Effect Consider the Quantity Theory Equation we studied in the previous lecture: MV = PY Suppose V is constant, M is growing 5% per year, Y is growing 2% per year, and r = 4. a. Solve for i. b. If the Fed increases the money growth rate by 2 percentage points per year, find i. c. Suppose the growth rate of Y falls to 1% per year. Note: These lecture notes are incomplete without having atten ...

Baylor, ECO 3307

Excerpt: ... lation, and countries with low average money growth tend to have low average inflation. 14. The creation of money serves as a source of revenue for governments. The purchasing power a government achieves in this way is known as seigniorage. 15. The Fisher equation says that i = r + e, where e is the expected inflation rate. The nominal interest rate (i) changes point-for-point with changes in e. Changes in e therefore have no effect on the real interest rate (r). Historical and crosscountry evidence shows that nominal interest rates tend to increase and decrease with increases and decreases in inflation. 16. The nominal interest rate is the rate of return on bonds, and is therefore one measure of the opportunity cost of holding wealth in the form of money. Other things equal, the lower the nominal interest rate, the more wealth people will want to hold in the form of money. 17. In equilibrium, the desired holding of wealth in the form of money (which we call money demand) must equal the supply of money. If (M ...

Toledo, ECONOMICS 202

Excerpt: ... sn't depend on the rate of money growth in the medium run or steady state even with population growth and technological change; it would be determined solely by the "patience" of households). f. False. The Fisher effect states that nominal interest rates increase one-for-one with inflation (it is real rates that are unaffected). g. True. Take a look at Figure 1 in chapter 18. h. True. We can always make a dollar tomorrow by taking one dollar today and keeping it in our pocket for one period. So a dollar tomorrow can never be worth more than a dollar today ( nominal interest rates must be non-negative). i. False. Real interest rates can be negative if it is not possible to costlessly store goods and transform them from goods today into goods tomorrow. 3. BJM Q18.4 a) The nominal rate of interest can never be negative. Money pays a zero rate of interest but also yields nonpecuniary services (it makes shopping easier). If bonds offered a negative nominal rate of interest, then there would be an arbitrage opportun ...

Minnesota, ECON 0070

Excerpt: ... University of Minnesota ECON4315 The Japanese Economy Spring, 2009 Assignment 2 (Total Score = 100pts + Bonus 5pts) Due Monday, February 23, at the beginning of the class. Note: Assignment must be typed, except graphs and formulas or they will recei ...