chapter 11

Question 1

Monetary Policies

Answer 1

• interest rates
• exchange rates

Question 2

Aims of Monetary Policies

Answer 2

expansionary
- increase economic growth
- lower unemployment

contractionary
- lower inflation
- improve BOP

Question 3

Theory to analyse how Interest Rate is determined

Answer 3

• keynesian liquidity preference theory

Question 4

Keynesian Liquidity Preference Theory

Answer 4

the rate of interest is determined by the demand for money (liquidity preference)

Question 5

Liquidity preference

Answer 5

• the preference of holding money over other kinds of assets
• the effective demand for money

Question 6

Purposes for the Demand for Money

Answer 6

• transactionary purposes
• precautionary purposes
• speculative purposes

Question 7

Factors causing changes in Interest Rates

Answer 7

• business & consumer expectations
• economic growth
• changes in government expenditure
• expectations of changes in exchange rates
• openness of the economy

Question 8

Strategies to Change Interest Rates

Answer 8

- open market operations
1. changing reserve requirements
2. changing discount rates
3. changing monetary base

- quantative easing

Question 9

Monetary Policy definition

Answer 9

demand-management policy to change AD by manipulating i/r or e/r

Question 10

Who carries out this policy ?

Answer 10

• central bank
• Monetary Authority of Singapore (MAS)

Question 11

Quantative Easing analysis

Answer 11

• expanded scope of asset purchases
• rescue trapped sectors
• provides liquidity to ‘trapped sectors’, encouraging greater (I)
• increase confidence in market increasign (C)
• AD increases

Question 12

Effects of Monetary Policy

Answer 12

direct effects :
- contractionary monetary policy
- expansionary monetary policy

indirect effects :
- hot money inflow/outflow
(increase i/r, hot money inflow)

Question 13

Liquidity Trap

Answer 13

occurs when interest rate is at/close to zero

Question 14

Foreign Exchange Rate

Answer 14

• the exchange value of a currency in terms of other currencies
• determined by the demand & supply in the FOREX market

Question 15

Demand Determinants of Exchange Rates

Answer 15

• foreigners purchanse of domestic g&s
• foreigners setting up businesses in the domestic country
• foreigners purchase of financial assets in domestic country
• foreigners depositing their money in domestic country

Question 16

Supply Determinants of Exchange Rates

Answer 16

• imports of foreign g&s
• country investing on businesses abroad
• purchasing of foreign financial assets
• residents depositinf money abroad
• residents making transfers abroad

Question 17

Exchange Rate Appreciation

Answer 17

• the increase in external value of a currency in terms of other currencies in the FOREX market
• revaluation

Question 18

Exchange Rate Depreciation

Answer 18

• the decrease in external value of a currency in terms of other currencies in the FOREX market
• devaluation

Question 19

Marshall-Lerner Condition

Answer 19

the sum of price elasticities of demand for exports & imports is greater than 1

Question 20

J-Curve Effect

Answer 20

price elasticities of exports and imports may be low in the short-run, worsening trade deficit initially