Chapter+08+_Supply+of+Money_

# Chapter+08+_Supply+of+Money_ - Chapter 8 Supply of Money 1...

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Chapter 8 Supply of Money 1

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Name’s BOND, Discount Bond A piece of paper promising to pay a known fixed amount (called future or face value) at a known future date. Also called an IOU or promissory note. 2 Bonds are issued by those who want to borrow money. What is a Bond?
3 2011 2012 P Bond F Bond Prices and Interest Rates r = F − P Bond P Bond × 100 Future Value Bond Price Interest Rate

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\$100 \$50 \$60 \$70 \$80 \$90 100 − 50 50 × 100 = 100% 100 − 70 70 × 100 = 43% 100 − 80 80 × 100 = 25% 100 − 90 90 × 100 = 11% F (2012) P Bond (2011) r = F − P Bond P Bond × 100 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 110% \$40 \$50 \$60 \$70 \$80 \$90 \$100 \$110 Interest Rate Bond Price The riskier the bond, the lower the price The lower the price, the higher the interest rate 100 − 60 60 × 100 = 67%
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 Percent MOODY'S BAA MOODY'S AAA 10-Year Treasury

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What is Money? 1. Medium of Exchange Double coincidence of wants. 2. Unit of Account 3. Store of Value Liquidity gives money an advantage. What is liquidity? 4. Standard of Deferred Payments 6 Money is anything that performs the following functions
What Can Serve as Money? Anything accepted by the public as money! 1. Commodity Money 2. Fiat Money (Legal Tender) How do we measure the stock of money? 7

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8 Currency Demand Deposits Travelers’ Checks Savings Deposits Small Denomination Time Deposits (Less Than \$100,000) Money Market Mutual Fund Deposits (Owned by Individuals) U.S. Monetary Aggregates Aggregate Measures of Money Supply M1 M2 M3 ?
So Generally Money = Currency + Some Bank Deposits 9 Money is a stock variable

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They take our deposits And pay us some interest 1% They loan out part of those deposits at a higher interest 11% They make a profit out of the interest differential Profit = 11% × (Loans) – 1% × (Deposits)
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Chapter+08+_Supply+of+Money_ - Chapter 8 Supply of Money 1...

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