3 (1)

Question 1

fcts of money?

Answer 1

• medium of exchange
• unit of account
• store value

Question 2

most narrow definition of money and its composants?

Answer 2

M1:

• currency in circulation
• checking deposits
• debit card accounts

Question 3

what are the factors affecting individuals money demand?

Answer 3

• expected rates of return on non-monetary assets
• inflation risk
• liquidity

Question 4

why is the inflation not very important in explaining individuals money demand?

Answer 4

unexpected inflation reduces the purchasing power of money, but many non-monetary assets are subject to inflation risk = inflation risk not very important in defining the demand of monetary assets

Question 5

what are the factors affecting aggregate money demand?

Answer 5

• expected rates of return on non-monetary assets
• prices of good and servies
• aggregate real income (GNP, Y)

Question 6

what is the aggregate Md equation?

Answer 6

Md = P * L(Y,R)

Question 7

what is the aggregate real Md equation?

Answer 7

Md/P = L(Y,R)

Question 8

real Md expresses aggregate demand in terms of…

Answer 8

goods and services

Question 9

why does the aggregate real Md L(R,Y) sloped downward?

Answer 9

for a given P and Y, it slopes downward because a decrease of R increases real Md of each HH and firm

Question 10

a change in R causes a shift of a change along the agg. real Md curve?

Answer 10

changes in R causes a mvmt along the curve L(R,Y)

Question 11

a change in Y causes a shift of a change along the agg. real Md curve?

Answer 11

Changes in Y causes a shift of the curve L(R,Y)

Question 12

in the money market, is there is an initial excess supply of money, what happens to R

Answer 12

R decreases because there is higher demand for asset = price increase = R decreases

Question 13

in the money market, is there is an initial excess demand of money, what happens to R

Answer 13

R increases because there is lower demand for asset = price decrease = R increases

Question 14

what reasons explain why prices are rigid in the short-run?

Answer 14

• wages (input costs)
• menu costs
• customer relationships

Question 15

in the short run, what are the effects of an increase in the US money supply?

Answer 15

increase of US Ms = decrease of R = lower expected returns on US deposits = $ depreciates to restore UIP

Question 16

in the short run, what are the effects of an increase in the euro money supply on R & E?

Answer 16

increase of euro Ms = decrease of Reuro = decrease of expected return on euro deposits = euro depreciates = $ appreciates to restore UIP

Question 17

given the price level and output, what are the short run effects of an increase of Ms on R and the currency?

Answer 17

increase of Ms = decrease of R = currency depreciation

Question 18

given the price level and output, what are the short run effects of a decrease of Ms on R and the currency?

Answer 18

decrease of Ms = increase of R = currency appreciation

Question 19

in the short run, what are the effects of a rise in real income on R&E?

Answer 19

A rise in real income (Y) = more production = more transactions = increase of Md (right shift of the curve) = excess demand of money = R increases = $ appreciation

Question 20

in the short run, what are the effects of a fall in output on R&E?

Answer 20

fall in output = Y decreases = Md decreases (left shift of the curve) = R decreases = $ depreciates

Question 21

for a given price level and Ms, what are the short run effects of an increase of Y on R and currency?

Answer 21

increase of Y = increase of R = currency appreciates

Question 22

for a given price level and Ms, what are the short-run effects of a decrease of Y on R and currency?

Answer 22

decrease of Y = decrease of R = currency depreciates

Question 23

what are the implications of money neutrality in the long run?

Answer 23

• real variables are not affected by money supply (real output Y, real R, real Md)

Question 24

what happens when there is a permanent change in money supply?

Answer 24

since real money demand L(R,Y) is not affected by a change in Ms, it follows that prices adjust one-for-one proportionally (Ms=P*L(R,Y))

Question 25

T or F: there is a strong positive relation between average MS growth and inflation

Answer 25

T: there is a strong positive relation between average MS growth and inflation - this confirms the strong long run link between national MS and national price levels predicted by economic theory

Question 26

illustrate the real money demand function

Answer 26

Question 27

illustrate the effect of a rise in real income on real money demand function

Answer 27

Question 28

illustrate the money market equilibrium

Answer 28

Question 29

illustrate the equilibrium in the US money market and the foreign exchange market

Answer 29

Question 30

illustrate the short run effect of an increase in the money supply on the money market and the forex market

Answer 30

Question 31

illustrate the short run effect of an increase in the euro area money supply on the money market and forex market

Answer 31

Question 32

illustrate the short run effect of a rise in real income on the money market

Answer 32

Question 33

illustrate the short and long run effects of a permanent increase in the US money supply

Answer 33

Question 34

illustrate the effect of a permanent increase in US money supply on MS, R$, P$ and E

Answer 34

Question 35

exchange rate overshooting summary

Answer 35