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The Econ Study Exam

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Exam Study

Chapter 3-What is Money

* Medium of Exchange: * Eliminates the trouble of finding a double coincidence of needs (reduces transaction costs) * Promotes specialization * A medium of exchange must * be easily standardized * be widely accepted * be divisible * be easy to carry * not deteriorate quickly * Unit of Account: * used to measure value in the economy * reduces transaction costs * Store of Value: * used to save purchasing power over time. * other assets also serve this function * Money is the most liquid of all assets but loses value during inflation * M1 (most liquid assets) = currency + traveler’s checks + demand deposits + other checkable deposits. * M2 (adds to M1 other assets that are not so liquid) = M1 + small denomination time deposits + savings deposits and money market deposit accounts + money market mutual fund shares.
Chapter 4- Interest Rates

Four types of credit market instruments * Simple Loan-pv= fv/(1+i)1 * Fixed Payment Loan-same cash flow every period throughout the life of the loan * Coupon Bond-add the fv at the end * Discount Bond- ytm>coupon

ROR vs Interest Rate * The return equals the yield to maturity only if the holding period equals the time to maturity * A rise in interest rates is associated with a fall in bond prices, resulting in a capital loss if time to maturity is longer than the holding period * The more distant a bond’s maturity, the greater the size of the percentage price change associated with an interest-rate change * The more distant a bond’s maturity, the lower the rate of return the occurs as a result of an increase in the interest rate * Even if a bond has a substantial initial interest rate, its return can be negative if interest rates rise…...

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