Chapter 13

Question 1

Transaction purpose

Answer 1

We hold money To finance our transactions

Question 2

Precautionary purpose

Answer 2

Hold some cash to face any future unexpected need.

Question 3

Asset purpose

Answer 3

hold some cash to diversify our portfolio of assets

Question 4

if Interest rate increase (i)

Answer 4

opportunity cost of holding money it is now costly to keep cash it is better to buy binds to benefit from this high interest rate. People now keep less cash and the quantity demanded of money decreases.

Question 5

if Increase to Price level (p)

Answer 5

Things are now more expensive so we need to hold more cash to finance our usual transactions (increase to MD)

Question 6

if Increase to income (y)

Answer 6

people are now more rich so they demand more goods and services (Increase to MD)

Question 7

On the graph, the changes to I, y , p…

Answer 7

Change in I causes change in Q.Dmoney (point on the curve)
Change in y,p causes change in MD curve (whole curve shift)

Question 8

Expansionary monetary policy

Answer 8

Money supply increases if the bank of Canada buys bonds, increases reserve ratio, and/or decrease target overnight rate

Question 9

Contractionary monetary policy

Answer 9

Money supply decreases is the bank of Canada sells bonds, increases reserve ratio, and/or increases target overnight rate.

Question 10

if Md<Ms

Answer 10

Excess supply of money, Surplus. This puts pressure on i to decrease till we reach equilibrium

Question 11

if Ms<Md

Answer 11

Excess demand, shortage, this puts pressure on i to increase till we reach the equilibrium

Question 12

Md = Ms

Answer 12

Money market is at equilibrium and no shortage or surplus

Question 13

Transmission mechanism

Answer 13

Shows how the money market affects the goods market

Question 14

Factors that determine the effectiveness of monetary policy in affecting y “GDP”

Answer 14

1. Slope “elasticity” of MD curve
2. Slope “elasticity” of C,I,NX curve
3. Slope “elasticity” of SRAs curve

Question 15

Monetary policy is more effective when..

Answer 15

The steeper the MD, The flatter C,I,NX and the flatter the SRAs. (peep graphs)

Question 16

Time Lags in Monetary Policy

Answer 16

Lag problem is less severe than in case of fiscal policy because monetary policy doesn’t require an approval from parliament

Question 17

Monetary policies dependence on Commercial banks

Answer 17

The effectiveness of monetary policy depends on how commercial banks react to the actions of central bank.
In case of recession, the bank of Canada uses expansionary monetary policy and he is expecting that commercial banks to take the money and give more loans to stimulate the economy. But If the commercial banks may be reluctant to give more loans because of fear of not getting it back. Commercial banks may not act like the way the central bank wants.

Question 18

Phillips Curve

Answer 18

Shows an inverse (negative) relation between inflation rate and unemployment rate in the short run. (graph)