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Fig. 2.3 Liquidity Preference Curve and the Money Supply

Liquidity Preference Theory - Investopedia

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According to liquidity preference theory, the slope of …

Unbiased expectations hypothesis: The hypothesis that forward exchange rates are unbiased predictors of future spot rates. (See forward parity.)
Unbiased Nature of the Forward Rate (UFR): States that the forward rate should reflect the expected future spot rate on the date of settlement of the forward contract.
Uncertainty avoidance: The extent to which a society tolerates uncertainty and ambiguity.
Uncertainty: Lack of information. Failure to know anything that may be relevant for an economic decision, such as future variables, details of a technology, or sales. In models, uncertainty usually appears as a random variable and corresponding probability density function. But in practice, most international models, especially of trade, assume certainty.
Uncovered interest parity: Equality of expected returns on otherwise comparable financial assets denominated in two currencies, without any cover against exchange risk. Uncovered interest parity requires approximately that i = i* + a where i is the domestic interest rate, i* the foreign interest rate and the expected appreciation of foreign currency at an annualized percentage rate.
Underemployment: The employment of workers for fewer hours or in less desirable jobs than they would prefer and are qualified for.
Under-invoicing: The provision of an invoice that states price as less than is actually being paid. This might be done on an import in order to reduce the amount that will be collected by an ad valorem tariff. Or it might be done on an export to reduce apparent profit and thus taxes.
Under-valued currency: The situation of a currency whose value on the exchange market is lower than is believed to be sustainable. This may be due to a pegged or managed rate that is below the market-clearing rate, or, under a floating rate, it may be due to speculative capital outflows. It contrasts with over-valued currency.
Underwriting syndicate: A temporary combination of investment banking firms formed to sell a new security issue.
Underwriting: Bearing the risk of not being able to sell a security at the established price by virtue of purchasing the security for resale to the public; also known as firm commitment underwriting. The act by investment bankers of purchasing securities from issuers for resale to the public.
Unemployment Rate: The ratio of the total number of unemployed persons to the total number of persons in the labor force. The ratio of unemployment to the labor force of a country.
Unequal exchange: Trade in which the labor used to produce a country's exports is more than the labor used to produce its imports, as in the exchange between low-wage developing countries and high-wage developed countries.
Unfair trade:
1. Under the GATT this refers only to exports that are subsidized or dumped
2. Under U.S. law, this also includes various actions that interfere with U.S. exports.
3. Also used to refer to any almost any trade that the speaker objects to, sometimes including that based on low wages or weak regulations.
Uniform Commercial Code: The model state legislation related to many aspects of commercial transactions that went into effect in Pennsylvania in 1954. It has been adopted with limited changes by most state legislatures.
Unit contribution margin: The amount of money available from each unit of sales to cover fixed operating costs and provide operating profits.
Unit elastic: Having an elasticity equal to one. For a price elasticity of demand, this means that expenditure remains constant as price changes. For income elasticity it means that expenditure share is constant. Homothetic preferences imply unit income elasticities. It contrasts with elastic and inelastic.
Unit isocost line: An isocost line along which cost is equal to one unit of the numeraire, such as one dollar.
Unit isoquant: The isoquant for a quantity equal to one unit of a good. The unit isoquant is useful for relating the price of a good to the prices of factors employed in its production.
Unit labor requirement: The amount of labor used per unit of output in an industry; the ratio of labor to output. In a Heckscher-Ohlin Model this varies along an isoquant as different techniques are chosen in response to different factor prices. But in a Ricardian model, these are the constant building blocks for defining comparative advantage and determining behavior.
Unit of account: A basic function of money, providing a unit of measurement for defining, recording, and comparing value. I.e., one dollar signifies not only a one dollar bill, but also a dollar's worth of money in other forms (deposits), of wealth in other forms than money, and of any good or service with a market value.
United Currency Options Market (UCOM): Market set up by the Philadelphia Stock Exchange in which to trade currencies.
United Nations Organizations: The complex and extensive system of organizations that exist under the umbrella of the United Nations. Several of these, like the WTO and the IMF, play critical roles in the international economy.
Unit-value isoquant: The isoquant for a quantity of a good worth one unit of value. This is meaningful only if the nominal price of the good is given, for some specified currency or numeraire. Unit-value isoquants are central to the Lerner diagram for analyzing the Heckscher-Ohlin Model.
Universal Banking: Bank practice, especially in Germany, whereby commercial banks perform not only investment banking activities equity positions in companies.
Unlevered beta (systematic business risk): The beta (or systematic risk) of a project as if it were financed with 100 percent equity.
Unlevered cost of equity: The discount rate appropriate for an investment assuming it is financed with 100 percent equity.
Unnatural trading bloc: A trading bloc among countries that are not natural trading partners.
Unsecured loans: A form of debt for money borrowed that is not backed by the pledge of specific assets.
Unskilled labor: Labor with a low level of skill or human capital. Identified empirically as labor earning a low wage, with a low level of education, or in an occupational category associated with these; sometimes crudely proxied as production workers.
Unsterilized Intervention: Foreign exchange market intervention in which the monetary authorities have not insulated their domestic money supplies from the foreign exchange transactions.
Unsustainable debt: A financial condition in which a country is unable to service its foreign (external) debt without decimating its economy.
Unsystematic (Diversifiable) Risk: Risks that are specific to a given firm, such as a strike. Risk that is specific to a particular security or country and that can be eliminated through diversification.
Unsystematic risk: The variability of return on stocks or portfolios not explained by general market movements. It is avoidable through diversification.
Up-and-In Option: An option that comes into existence if and only if the currency strengthens enough to cross a preset barrier.
Up-and-Out Option: An option that is canceled if the underlying currency strengthens beyond the outstrike.
Upstream subsidization: Export of a good one of whose inputs has been subsidized.
Usury: The practice of charging or paying exorbitant interest on a loan or other transaction. Note: in Islamic societies, charging or receiving any amount of interest is considered usury.
Utility function: A function that specifies the utility (usefulness, well being) of a consumer for all combinations goods consumed (and sometimes other considerations). It represents both their welfare and their risk preferences.
Utility possibility frontier: In a diagram with levels of individual utility on the axes, a curve showing the maximum attainable levels of utility in a given situation, such as free trade or autarky.

Keynes Liquidity Preference Theory of Interest | …

Central banks responded with exceptional liquidity support during the financial crisis to prevent a systemic meltdown. They broadened their tool kit and extended liquidity support to nonbanks and key financial markets. Many want central banks to embrace this expanded role as “market maker of last resort” going forward. This would provide a liquidity backstop for systemically important markets and the shadow banking system that is deeply integrated with these markets. But how much liquidity support can central banks provide to the shadow banking system without risking their balance sheets? I discuss the expanding role of the shadow banking sector and the key drivers behind its growing importance. There are close parallels between the growth of shadow banking before the recent financial crisis and earlier financial crises, with rapid growth in near monies as a common feature. This ebb and flow of shadow-banking-type liabilities are indeed an ingrained part of our advanced financial system. We need to reflect and consider whether official sector liquidity should be mobilized to stem a future breakdown in private shadow banking markets. Central banks should be especially concerned about providing liquidity support to financial markets without any form of structural reform. It would indeed be ironic if central banks were to declare victory in the fight against too-big-to-fail institutions, just to end up bankrolling too-big-to-fail financial markets.

Ex Ante Bond Returns and the Liquidity Preference Hypothesis

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It is widely perceived that today's conventional monetary wisdom, and the common practice of monetary policy based thereupon, is essentially "monetarist" by nature, if not by name. One objective of this paper is to assess whether monetarism has had a lasting effect on the theory and practice of monetary policy; another is to scrutinize the key dividing lines between Milton Friedman's monetary thought and that of John Maynard Keynes. Among the paper's main theoretical findings are that the key issue is the theory of interest, which is at the root of differences in approach to money demand and liquidity preference. Similarities are more pronounced with respect to the supply of money and monetary policy control issues. However, while Keynes favored a stabilized wage unit combined with a flexible central bank to steer interest rates and aggregate demand, Friedman advocated a stabilized central bank combined with a free interest rate and employment determination in financial and labor markets, respectively. Additional differences arise at the practical and empirical levels: the dynamics of adjustment processes and expectation formation on the one hand, and the relative efficiency and riskiness of market-driven versus government-guided adjustments on the other. The puzzling fact is that, despite today's dominant market-enthusiast ideology, Friedman's idea of delegation—not to independent central bankers, but to the markets—enjoys remarkably little popularity.

In his John Maynard Keynes relied on two different premises to argue that the interest rate need not rise with rising levels of expenditure. One of these was the elasticity of the money supply, and the other was the interaction between financial and industrial circulation. A decrease (increase) in what Keynes called the bear position was similar in its impact to that of a policy-induced increase (decrease) in the money supply. In his this second line of argument lost much of its force as it became reformulated under the rubric of Keynes's liquidity preference theory of interest. Assuming that the interest rate sets the return on capital, Keynes dismissed the effect of bull or bear sentiment in equity markets as a second-order complication that can be ignored in analyzing the equilibrium level of investment and output. The objective of this paper is to go back to this old theme from the and underscore its importance for the Keynesian theory of the business cycle.

Glossary of banking terms | American Banker

Using data from the 1994–95 Survey of Families in Israel—which includes 1,607 urban Jewish respondents interviewed on topics relating to work behavior, household income, wealth, assistance received from parents and given to children, and views about financial responsibilities between parents and children—the authors examined attitudes in Israel about intergenerational assistance and the effects of these attitudes on transfer decisions by parents. Views about parental obligations are likely not independent of a country's economic and social organization. In a country with an extensive program of public assistance for young adults, for example, there may be less need for private family transfers and less of a sense of parental responsibility for providing support. Similarly, where young couples face severe liquidity constraints or otherwise require substantial resources in order to begin a household, parental feelings of obligation might be heightened. Israel is a country in which the need for parental support is high and the level of parental involvement in the financial lives of young adults is often considerable.

This paper examines two issues. First, we compare, based on the ratio of output-gap variability to inflation variability, the monetary policy performance of eleven EMU countries for the whole period of the EMS. Second, we examine whether the introduction of an implicit inflation-targeting by the EMU member countries after the Maastricht Treaty changed the trade-off between inflation variability and output-gap variability. We employ a stochastic volatility model for the whole period of the EMS and for two sub-periods (i.e., before and after the Maastricht Treaty). We find that for the whole period the trade-off ratio varies among EMU countries, especially in the case where industrial production is utilized to construct the output-gap variable. The results also vary from the point of view of how the trade-off variabilities change for each country before and after the Maastricht Treaty. The implication of these findings is that asymmetries exist in the euro area as a result of either different monetary policy preferences or different economic structures among the EMU's member countries.

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    Definitions of key terms and phrases used in commercial, retail and investment banking and bank regulation

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