Money Supply-Assets Notes - Econ 205 Discussion Section...

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Econ 205 Discussion Section Note 2/28; 3/5 Higher Interest Rate Tends to Lower Asset Prices Inverse relationship between interest rates and asset prices Present Value: the dollar value today of the time stream of income generated by that asset. It is measured by calculating how much money invested today would be needed, at the going interest rate, to generate the asset’s future stream of receipts. Generally speaking, V N i N i N i N i = + + + + + + + + 1 2 2 3 3 4 4 1 1 1 1 ( ) ( ) ( ) . . . Example: a perpetual asset that has a constant yield $N each year forever. Then the present value is just V=$N/i Components of Money Supply: Two widely used definition—M1 and M2. The difference between these two is the different liquidity of the two. M2 consists of components that are not so liquid, i.e. they cannot be used as means of exchange for all purchases. M1: including currency, checking accounts (demand deposits), and traveler’s checks M2: including M1, saving accounts, time deposits, money market mutual funds
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