ASSET MARKET MONEY AND PRICE

M1 money aggregate currency travelers check demand

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M1 money aggregate: currency, travelers ‘check, demand deposits, other checkable deposits all the components are widely accepted for payments and are actively used M2 money aggregate : Components of M1, saving deposits, small denomination time deposits, MMMFs (non-institutional) Money supply = amount of money available in an economy determined by central bank (Federal reserve bank in USA) if the only form of money is currency central bank needs to increase the amount of currency in circulation. How? Central bank use newly minted currency to buy financial assets from the public increases the public holding of money increase money supply (Open market purchase) - selling gvt bonds to the public in exchange of currency reduces money supply open –market sale open-market sale + open–market purchase = open-market operations ALSO, increasing money supply = buying newly issued government bonds from the gvt in exchange in newly minted currency cpdt. In this case, increasing money supply help gvt finance its expenditures by printing money (often occur in poor countries, or countries, or countries wracked by war) II. Portfolio allocation and the demand for assets How do people determine the amount of money they choose to hold/how to distribute the wealth among many types of assets. Portfolio: set of assets a holder of wealth chooses to own / Portfolio allocation decision: how much of each asset to hold. 4 characteristics matter for portfolio allocation decision.
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Expected return: rate of return is the rate of increase in its value per unit of time high return
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