B15

Question 1

What is money

Answer 1

It serves as a medium of exchange, a store of value and a unit of account.

Question 2

What is the money supply

Answer 2

The total amount of currency and checking deposits held by households and firms

Question 3

Are the large deposits traded on the foreign exchange markets considered a part of the money supply

Answer 3

No as they are seen as less liquid and are not used in ruoutine transactions

Question 4

What three things determine the value of an asset

Answer 4

Its expected return, the riskiness of the investment and the assets liquidity

Question 5

What happens to the demand for money (currency) if the interest rate rises

Answer 5

All else equal it falls as holding cash becomes comparatively wasteful to keeping it in bonds or bank deposits

Question 6

What three factors determine the demand for money

Answer 6

The interest rate, the price levels (inflation) and the real national income

Question 7

How is the interest rate related to the money supply

Answer 7

if interest is high people want to keep their money in interest bearing assets and so the money supply decreases. The market always moves to the equalibrium where the interest rate leads to a money supply equal to the money demanded.

Question 8

What happens to the interest rate if there is excess demand for money

Answer 8

it increases

Question 9

what commonly causes interest rates to be low

Answer 9

when many people compete to lend their money aka when the money supply is in excess

Question 10

what happens to the interest rate of the economic output increases all else equal

Answer 10

it increases

Question 11

What happens to the exchange rate if one currencys money supply increases

Answer 11

it depreciates, more is less

Question 12

how is the exchange rate effected if a countrys output increases

Answer 12

output increases real gnp which increases the demand for money which increases the interest rate which appreciates the exchange rate

Question 13

does the money supply in one country effect the money market equalibrium in another

Answer 13

No not directly

Question 14

What happens to the price level in a country if the money supply increases

Answer 14

the price level increases

Question 15

A change in the money supply has an effect on the long run interest rate and output levels

Answer 15

No, only short term effect as prices change to compensate for the increased/decreased money supply

Question 16

What happens in the long run if a countrys money supply decreases permanently

Answer 16

the exchange rate appreciates proportionally

Question 17

What are the three mains sources of price changes

Answer 17

excess demand for output and labor, inflation expectations and raw material prices

Question 18

What happens when exchange rates overshoot

Answer 18

When the reaction to a change is greater than the long run equalibrium

Question 19

What are the effects of inflation targetting on different tyoes of countries?

Answer 19

Developed nations are often better of as it manages expectations and softens the business cycle but developing countries might have their develoopment hindered by the central bank pulling the breaks on the economy

Question 20

What causes exchange rates to overshoot

Answer 20

The sluggish change in price levels which give macroeconomic events greater percived impact than the long run equalibrium equivalent of their cause