3 (1) Flashcards
fcts of money?
- medium of exchange
- unit of account
- store value
most narrow definition of money and its composants?
M1:
- currency in circulation
- checking deposits
- debit card accounts
what are the factors affecting individuals money demand?
- expected rates of return on non-monetary assets
- inflation risk
- liquidity
why is the inflation not very important in explaining individuals money demand?
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
what are the factors affecting aggregate money demand?
- expected rates of return on non-monetary assets
- prices of good and servies
- aggregate real income (GNP, Y)
what is the aggregate Md equation?
Md = P * L(Y,R)
what is the aggregate real Md equation?
Md/P = L(Y,R)
real Md expresses aggregate demand in terms of…
goods and services
why does the aggregate real Md L(R,Y) sloped downward?
for a given P and Y, it slopes downward because a decrease of R increases real Md of each HH and firm
a change in R causes a shift of a change along the agg. real Md curve?
changes in R causes a mvmt along the curve L(R,Y)
a change in Y causes a shift of a change along the agg. real Md curve?
Changes in Y causes a shift of the curve L(R,Y)
in the money market, is there is an initial excess supply of money, what happens to R
R decreases because there is higher demand for asset = price increase = R decreases
in the money market, is there is an initial excess demand of money, what happens to R
R increases because there is lower demand for asset = price decrease = R increases
what reasons explain why prices are rigid in the short-run?
- wages (input costs)
- menu costs
- customer relationships
in the short run, what are the effects of an increase in the US money supply?
increase of US Ms = decrease of R = lower expected returns on US deposits = $ depreciates to restore UIP
in the short run, what are the effects of an increase in the euro money supply on R & E?
increase of euro Ms = decrease of Reuro = decrease of expected return on euro deposits = euro depreciates = $ appreciates to restore UIP
given the price level and output, what are the short run effects of an increase of Ms on R and the currency?
increase of Ms = decrease of R = currency depreciation
given the price level and output, what are the short run effects of a decrease of Ms on R and the currency?
decrease of Ms = increase of R = currency appreciation
in the short run, what are the effects of a rise in real income on R&E?
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
in the short run, what are the effects of a fall in output on R&E?
fall in output = Y decreases = Md decreases (left shift of the curve) = R decreases = $ depreciates
for a given price level and Ms, what are the short run effects of an increase of Y on R and currency?
increase of Y = increase of R = currency appreciates
for a given price level and Ms, what are the short-run effects of a decrease of Y on R and currency?
decrease of Y = decrease of R = currency depreciates
what are the implications of money neutrality in the long run?
- real variables are not affected by money supply (real output Y, real R, real Md)
what happens when there is a permanent change in money supply?
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))
T or F: there is a strong positive relation between average MS growth and inflation
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
illustrate the real money demand function
illustrate the effect of a rise in real income on real money demand function
illustrate the money market equilibrium
illustrate the equilibrium in the US money market and the foreign exchange market
illustrate the short run effect of an increase in the money supply on the money market and the forex market
illustrate the short run effect of an increase in the euro area money supply on the money market and forex market
illustrate the short run effect of a rise in real income on the money market
illustrate the short and long run effects of a permanent increase in the US money supply
illustrate the effect of a permanent increase in US money supply on MS, R$, P$ and E
exchange rate overshooting summary
