Week 4: Mentorary Policy and Business Strategy

1. Real Interest Rate=Nominal Interest Rate-Inflation

2. The determinant of Money: Transaction demand and Asset demand (speculative demand)  

     1) The total money value of all goods and services up, the transaction demand up.

3. Holding money will result in opportunity cost in two ways: purchase power loss and investment loss.

4. Interest rates rise==> Investment Opportunity Cost rises==>Asset demand for money falls.

Expectation of inflation falls==>less risk of loss of value of money ==> Lower opportunity cost==> Asset demand for money rises.

5. Money Multiplier =1/reserve rate

6. Bank Run 银行挤兑

7. Lender of last resort  最终贷款人

8. Basic Tools of Central Bank

   1) Setting the reserve requirement

   2) Setting the discount rate ( which is the interest rate central bank charges bank to borrow from central bank)

     lower discount rate, cheaper the money that the bank can get from central bank.

   3) Open Market Operation (buying or selling the government securities to expand or contract money supply)

   4) Quantitative Easing

9. Monetary Policy can be faster and more flexible than Fiscal Policy but lacks the precision.

10. We can't push a string but can pull a string. That's to say, monetary policy can rein economy much better than stimulate it.