ch13-16

Question 1

Equation for private savings? S_p=???

Answer 1

Y-T-G

Question 2

Equation for Public Savings? S_g = ???

Answer 2

S_g=T-G

Question 3

National Income Identity?

Answer 3

Y=C+I+G+EX-IM

Question 4

What is net foreign wealth?

Answer 4

Amount of assets/wealth you have in other countries. When Exports > Imports, NFW is increasing

Question 5

What are 2 equations for Total Savings (S)?
S= ? - ? - ?
S=?+?

Answer 5

S=Y-C-G

S=I+CA

Question 6

Money demand equation in equilibrium?

L(R, Y) = ???

Answer 6

L(R, Y) = M^d/P
also, L(R, Y) = M^s/P

since M^s = M^d in equilibrium

Question 7

Interest parity equation?

Answer 7

R_$=R_euro + (E_expected-E)/E

Question 8

Monetary approach to exchange rate (USD-EURO)

Answer 8

M=P_us/P_eu =

[M_s_us/L(R_$,, Y_us)]/[M_s_eu/L(R_euro, Y_eu)]

Question 9

Difference between longrun and shortrun approaches to exchange rates? Name 3 things that happen in longrun only

Answer 9

In longrun, prices adjust to market conditions.

• Wages adjust to supply/demand of labor
• Output and income are determined by #workers and factors of production, NOT by quantity of money supplied
• Real interest depends on supply and demand of saved funds

Question 10

Aggregate money demand - what happens to it when R (interest) increases?

Answer 10

demand decreases, because opportunity of holding money increases, non-money assets are more valuable investments now

Question 11

Aggregate money demand - what happens when prices increase?

Answer 11

demand increases, people need more money to afford the same basket of goods as before

Question 12

Aggregate money demand - what happens when Y (output) increases?

Answer 12

demand increases as people’s income increases, since they want to spend more money now

Question 13

In equilibrium, express inflation in terms of money supply and demand

Answer 13

inflation = money supply growth - money demand growth

P = Change in M_s/M_s - Change in M_d/M_d

Question 14

In the short run, how would a domestic increase in the money supply affect the exchange rate?

Answer 14

Increase in money supply causes increase in prices domestically, causing exchange rate to rise (depreciate)

Question 15

Real exchange rate: q=??

Answer 15

q=(E_$/euro * P_eu)/P_us

Question 16

Nominal exchange rate in terms of real interest rate? E_$/euro = ?

Answer 16

E_$/euro = q_us/eu * (P_us/P_eu)

Question 17

what happens to real and nominal exch rate when increase in domestic demand for goods?

Answer 17

real: increased demand for us products causes increase in domestic prices P_us, which decreases q_us/eu (appreciation)
nominal: real determines nominal, it also appreciates

Question 18

what happens to real and nominal exch rate when increase in domestic supply for goods?

Answer 18

real: increased supply causes domestic prices to decrease. thus, q_us/eu increases (depreciates).
nominal: real depreciates. HOWEVER, increases domestic supply causes increases output Y_us, which increases domestic money demand, which decreases US prices, causing appreciation. So effect is ambiguous, since:

real causes depreciation, but increased output causes appreciation

Question 19

when money growth increases, what happens to inflation? is it temporary or permanent?

Answer 19

permanent increased inflation

Question 20

when money supply increases once, what happens to inflation? permanent or temporary?

Answer 20

temporary increase in inflation

Question 21

draw the graph for us-euro exchange rates when the dollar interest rises, then give an explanation for why this happens.

Answer 21

(in your notes). dollar appreciates because the return on the dollar is higher, therefore the demand for the dollar is higher now relative to the euro

Question 22

draw the graph for us-euro exchange rates when european (foreign) interest rates rise. explain why this occurs

Answer 22

in your notes. a rise in european interest causes the expected euro return line to shift out, because euro deposits have higher returns now.

Question 23

draw the graph for aggregate real money demand when income, Y, increases

Answer 23

in your notes. The demand for money increases and the line shifts out, since at every level of interest, people are more to spend money and thus have higher demand for money.

Question 24

draw the graph for real money holdings in the short term when money supply increases and justify

Answer 24

in notes. increase in M implies increase in M/P, so real money holdings shifts out (in the short term) causing interest to fall.

Question 25

draw the graph for real money holdings when real income rises. justify

Answer 25

a rise in real income increases demand for real money

Question 26

write two ways to represent the nominal interest differential, R_$ - R_euro.

Answer 26

in your notes.

Question 27

write an expression that is equivalent to expected real interest differential

Answer 27

in your notes!

Question 28

difference between nominal and real interest?

Answer 28

real interest only affected by money supply and demand.

nominal affected by everything else

Question 29

draw a double-graph showing the affects on exchange rate and real money holdings, when an increase in money supply happens

Answer 29

in notes.

Question 30

show what happens to money supply, domestic interest, domestic price level, and exchange rate, when the us government announces a rise in money supply growth rate.

Answer 30

in notes.

Question 31

when us money supply growth decreases, what happens to the exchange rate and why?

Answer 31

nominal interest falls, so demand for money rises, so domestic prices fall, so exchange rate appreciates, usd appreciates

Question 32

what happens to exchange rate when us output supply decreases?

Answer 32

real exchange rate appreciates due to less supply, causing nominal interest to depreciate. however, output decrease causes income to fall, so money demand falls, so domestic prices fall, which will make usd appreciate. thus effect is ambiguous.

Question 33

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