Exam1 - M2 doesn’t include T-Bills CPI overstates...

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Unformatted text preview: M2 doesn’t include T-Bills. CPI overstates inflation b/c of sub bias. Shares of stock are a standardized financial instrument. Options are a right to sell a fixed quantity of an underlying instrument at a particular price. Longer the times until payment is made, the less valuable it is. Financial intermediation increases economy’s ability to produce. Financial instruments are used as a store of value. Over the counter market is a network of dealers connected electronically. Derivatives are used to transfer risk. GDP is market value. Real GDP changes in quantities from changes in prices. GPD growth rate= (yr 2-yr1)/yr 1. Nominal GDP=prices x real. GDP deflator = nominal/real. Inflation rate = (deflator yr 2 – deflator yr 1)/deflator yr 1 x 100. M1- only currency and deposit accounts that people can write checks on. M2- all of M1 + time deposits, other less liquid assets. Indirect finance- institution stands between lender and borrower. Direct finance- borrowers sell directly to lenders. Financial instrument obligates one party to transfer something of value to another, specifies that payment will be made at some future date. Bigger the payment, more valuable the instrument. Sooner the payment is made, more valuable. More likely payment will be made, more valuable. future date....
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