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TESTE DEIN WISSEN

■ The higher the price of the bond, the _______ the interest rate.
■ The _______ the interest rate, the lower the price today.

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TESTE DEIN WISSEN

■ The higher the price of the bond, the lower the interest rate.
■ The higher the interest rate, the lower the price today.

Lösung ausblenden
TESTE DEIN WISSEN

What happens to the price and interest rate of bonds when the central bank decides to buy/sell bonds?

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TESTE DEIN WISSEN

Buy: Demand goes up, Increase in the price of bonds and a decrease in he interest rate. The purchase of bonds by the central bank shifts the money supply to the right.

Selll: Demand goes down, Decrease in the price of bonds and an increase in the interest rate. The sale of bonds by the central bank shifts the money supply to the left.

Lösung ausblenden
TESTE DEIN WISSEN

What is the Nominal interest rate? What is the real interest rate?

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TESTE DEIN WISSEN

Nominal versus Real Interest Rates

■ Nominal interest rate is the interest rate in terms of dollars.
■ Real interest rate is the interest rate in terms of a basket of
goods.
■ We must adjust the nominal interest rate to take into
account expected inflation.

Lösung ausblenden
TESTE DEIN WISSEN

Bank runs

■ Depositors will try to withdraw their deposits before the bank fails in an
attempt to prevent any losses: a bank run takes place.
■ However, the bank, despite being solvent, will not be able to pay back all
deposits (or a substantial fraction of them) at once. Why?

Lösung anzeigen
TESTE DEIN WISSEN

– The bank needs to come up with the funds to pay investors. BUT Assets
are illiquid!
The bank cannot call back the loans it made before their
maturity. If it tries to sell them, it may have to do so at “fire-sale” prices.

■ As the previous example shows, a perfectly solvent bank may fail as a
consequence of a bank run
– Bank runs can act as “self-fulfilling prophecies”: the bank fails because it
is believed to be about to fail, but it won’t fail if depositors trust it!

Lösung ausblenden
TESTE DEIN WISSEN

Do not say "Mary is making a lot of money"; say "???"

Do not say "Joe has a lot of money"; say "???"

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TESTE DEIN WISSEN

"Mary has a high income"

"Joe is very wealthy"

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TESTE DEIN WISSEN

What is the "curse of cash"?

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TESTE DEIN WISSEN

large denomination banknotes are easier to shift thus, making them appealing to not only money launderers but also drug dealers, tax evaders, and terrorists.

Lösung ausblenden
TESTE DEIN WISSEN

Fire sales and bank runs

The lower the liquidity of bank assets (the more difficult they
are to sell), the higher___________

■ The higher the liquidity of the liabilities (e.g., checkable or
demand deposits), the higher ___________

Lösung anzeigen
TESTE DEIN WISSEN

Fire sales and bank runs
■ The lower the liquidity of bank assets (the more difficult they
are to sell), the higher the risk of being sold at fire sale
prices (prices far below the true value) and the risk that the
bank becomes insolvent.
■ The higher the liquidity of the liabilities (e.g., checkable or
demand deposits), the higher the risk of fire sales, and the
risk that the bank becomes insolvent and thus faces bank
runs.

Lösung ausblenden
TESTE DEIN WISSEN

■ Why can a healthy bank be subject to a bank run?

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TESTE DEIN WISSEN

– If other banks are actually in a less sound position, the public may worry
about the whole banking sector in general
– Some borrowers in the economy may indeed have problems to pay back
their loans. Depositors could be unable to tell the risk of the loans made
by their particular bank

■ During the Great Depression of the 1930s, the failure of several insolvent
banks lead to bank runs on other, solvent banks

Lösung ausblenden
TESTE DEIN WISSEN

From a Housing Problem to a Financial Crisis
■ The demand for goods decreased due to the _________________ and lower confidence.
■ The IS curve shifted to the _____.
■ Policy makers responded to this large decrease in demand.

Lösung anzeigen
TESTE DEIN WISSEN

From a Housing Problem to a Financial Crisis
■ The demand for goods decreased due to the high cost of
borrowing and lower confidence.
■ The IS curve shifted to the left.
■ Policy makers responded to this large decrease in demand.

Lösung ausblenden
TESTE DEIN WISSEN

What does the nominal wage depend on? what do both workers and firms car about?

Lösung anzeigen
TESTE DEIN WISSEN

■ Both workers and firms care about real wages (W/P), not nominal
wages
.
■ The nominal wage depends on the expected price level (rather than the
actual price level) because when nominal wages are set, the relevant price
levels are not yet known.

Lösung ausblenden
TESTE DEIN WISSEN

What are Comparative statics and dynamics?

Lösung anzeigen
TESTE DEIN WISSEN

Comparative statics versus dynamics
■ Comparative statics:
– Before and after
■ Dynamics:
– How do we get from before to after
■ We will be primarily concerned with comparative statics

Lösung ausblenden
TESTE DEIN WISSEN

What is the natural rate of unemployment?

Lösung anzeigen
TESTE DEIN WISSEN

It is the rate at which the wage demands of workers are consistent with the price decisions of firms.

Lösung ausblenden
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Q:

■ The higher the price of the bond, the _______ the interest rate.
■ The _______ the interest rate, the lower the price today.

A:

■ The higher the price of the bond, the lower the interest rate.
■ The higher the interest rate, the lower the price today.

Q:

What happens to the price and interest rate of bonds when the central bank decides to buy/sell bonds?

A:

Buy: Demand goes up, Increase in the price of bonds and a decrease in he interest rate. The purchase of bonds by the central bank shifts the money supply to the right.

Selll: Demand goes down, Decrease in the price of bonds and an increase in the interest rate. The sale of bonds by the central bank shifts the money supply to the left.

Q:

What is the Nominal interest rate? What is the real interest rate?

A:

Nominal versus Real Interest Rates

■ Nominal interest rate is the interest rate in terms of dollars.
■ Real interest rate is the interest rate in terms of a basket of
goods.
■ We must adjust the nominal interest rate to take into
account expected inflation.

Q:

Bank runs

■ Depositors will try to withdraw their deposits before the bank fails in an
attempt to prevent any losses: a bank run takes place.
■ However, the bank, despite being solvent, will not be able to pay back all
deposits (or a substantial fraction of them) at once. Why?

A:

– The bank needs to come up with the funds to pay investors. BUT Assets
are illiquid!
The bank cannot call back the loans it made before their
maturity. If it tries to sell them, it may have to do so at “fire-sale” prices.

■ As the previous example shows, a perfectly solvent bank may fail as a
consequence of a bank run
– Bank runs can act as “self-fulfilling prophecies”: the bank fails because it
is believed to be about to fail, but it won’t fail if depositors trust it!

Q:

Do not say "Mary is making a lot of money"; say "???"

Do not say "Joe has a lot of money"; say "???"

A:

"Mary has a high income"

"Joe is very wealthy"

Q:

What is the "curse of cash"?

A:

large denomination banknotes are easier to shift thus, making them appealing to not only money launderers but also drug dealers, tax evaders, and terrorists.

Q:

Fire sales and bank runs

The lower the liquidity of bank assets (the more difficult they
are to sell), the higher___________

■ The higher the liquidity of the liabilities (e.g., checkable or
demand deposits), the higher ___________

A:

Fire sales and bank runs
■ The lower the liquidity of bank assets (the more difficult they
are to sell), the higher the risk of being sold at fire sale
prices (prices far below the true value) and the risk that the
bank becomes insolvent.
■ The higher the liquidity of the liabilities (e.g., checkable or
demand deposits), the higher the risk of fire sales, and the
risk that the bank becomes insolvent and thus faces bank
runs.

Q:

■ Why can a healthy bank be subject to a bank run?

A:

– If other banks are actually in a less sound position, the public may worry
about the whole banking sector in general
– Some borrowers in the economy may indeed have problems to pay back
their loans. Depositors could be unable to tell the risk of the loans made
by their particular bank

■ During the Great Depression of the 1930s, the failure of several insolvent
banks lead to bank runs on other, solvent banks

Q:

From a Housing Problem to a Financial Crisis
■ The demand for goods decreased due to the _________________ and lower confidence.
■ The IS curve shifted to the _____.
■ Policy makers responded to this large decrease in demand.

A:

From a Housing Problem to a Financial Crisis
■ The demand for goods decreased due to the high cost of
borrowing and lower confidence.
■ The IS curve shifted to the left.
■ Policy makers responded to this large decrease in demand.

Q:

What does the nominal wage depend on? what do both workers and firms car about?

A:

■ Both workers and firms care about real wages (W/P), not nominal
wages
.
■ The nominal wage depends on the expected price level (rather than the
actual price level) because when nominal wages are set, the relevant price
levels are not yet known.

Q:

What are Comparative statics and dynamics?

A:

Comparative statics versus dynamics
■ Comparative statics:
– Before and after
■ Dynamics:
– How do we get from before to after
■ We will be primarily concerned with comparative statics

Q:

What is the natural rate of unemployment?

A:

It is the rate at which the wage demands of workers are consistent with the price decisions of firms.

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