econ notes 1203

econ notes 1203 - If price of bond is $20…effective...

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Motives for holding money Transaction motive o Buy stuff Precautionary motive o Just Incase you need it Asset motive/speculative motive o Money risk in future, interest rate, balance portfolio Demanding More Money Higher interest rate, demand less money Expectations: expect to get promotion, demand more money Price level increases à need more money to buy more expensive things Supplying More Money Vertical line: set by the FED Equilibrium interest rate is where MS = MD (7% or so) To Get More Money Take out a loan o Banks increase interest rate until money demanded equals how much fed supplies o Less money demanded Sell bonds o Cash in your bonds you have Assume bond pays $2 in one year
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Unformatted text preview: If price of bond is $20…effective interest rate would be: 10% • Pays $20 for bond…in one year you get $22 You are buying “the right” to get $22 at some given point in time If price were $10, effective interest rate would be 120% If price were $18, you get $4 in interest, effective interest rate would be roughly 25% If the price were $22, effective interest rate would be 0% Price of bonds goes down, interest rates go up Take out loans, interest rate goes up What the FED can do: * buy bonds, money supply increases * fed enters bond market, increase in demand * intrest rate decreases...
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