Ch 15

Question 1

Money

Answer 1

Currency in circulation plus deposits

Question 2

Three functions of money

Answer 2

Medium of exchange, unit of account and store of value 

Question 3

Who controls the money supply? 

Answer 3

In the US, the federal reserve, which serves as the central bank 

Question 4

Money demand

Answer 4

Monetary assets people are willing to hold 

Question 5

What influences demand of money 

Answer 5

Interest rates, risk, and liquidity 

Question 6

What influences aggregate demand of money

Answer 6

Interest rates, prices and income 

Question 7

Aggregate demand of money

Answer 7

Md = P x L(R,Y)

Question 8

Has interest rate falls what happens to aggregate real money demand 

Answer 8

Increases

Question 9

What happens when the money supply exceeds money demand

Answer 9

There is an excess demand for interest bearing assets

Question 10

What happens when interest rates rise very high 

Answer 10

Long-term assets are sold, and banks won’t cash in hand, since this indicates a financial crisis

Question 11

What happened when the Fed increases money supply? 

Answer 11

Interest rates go down and real money holdings go up

Question 12

How do central banks influence exchange rates? 

Answer 12

They change the money supply which affects the interest rate, which then affects the exchange rate

Question 13

What happens when there is an expansionary shock from the central bank 

Answer 13

Currency depreciates

Question 14

When money supply increases, what happens 

Answer 14

Interest rates, go down, which depreciates currency

Question 15

When the euro money supply increases, what happens to the dollar

Answer 15

This causes the euro to depreciate which causes a dollar to appreciate 

Question 16

Short run and Long run

Answer 16

SR = prices don’t have enough time to adjust to market

LR = prices of f.o.p and output have time to adjust

Question 17

What is true for changes in money in the long run 

Answer 17

They equal changes in prices 

Question 18

How does a change in the money supply cause a change in the price?


Answer 18

Exist demand of goods and services, inflationary expectations, and raw materials


Question 19

What can a permanent shock from money supply do? 

Answer 19

If it’s an increase of the money supply in the SR, it’ll make interest rates go down, and the exchange rate go up
In the LR it’ll increase prices which will bring the money supply back down interest rates, back up, and the exchange rate back down, but not to where they originally were aside from the money supply

And vice versa

Question 20

Exchange rate overshooting 

Answer 20

When the exchange rates immediate response to a change is greater than its long run response (volatility)

Predicted to occur when monetary policy has an immediate effect on interest rates but not on prices and exp inflation