Chapter 16

Question 1

what are transactions demand for money

Answer 1

the stock of money people hold to pay everyday predictable expenses

Question 2

what is precautionary demand for money?

Answer 2

the stock of money people hold to pay unpredictable expenses

Question 3

what is speculative demand for money

Answer 3

the stock of money people hold to take advantage of expected future changes in the price of bonds, stocks or other non-money financial assets

Question 4

what happens as the interest rate falls

Answer 4

as the interest rate falls the opportunity cost of holding money falls and people increase their speculative balances

Question 5

what is the demand for money curve

Answer 5

curve representing the quantity of money that people hold at different possible interest rates, ceteris paribus

Question 6

what is the relationship shared between the quantity of money demanded and the interest rate

Answer 6

inverse

Question 7

T or F the speculative demand for money at possible interest rates gives the demand for money curve its downward slope

Answer 7

True

Question 8

what does an decrease in the interest rate do to the demand

Answer 8

a decrease in the interest rate causes an increase in the quantity of money demanded

Question 9

What are the causation chains for the equilibrium interest rate?

Answer 9

excess money demand > people sell bonds > bond prices fell and the interest rate rises

excess money supply > people buy bonds > bond prices rise and the interest rate falls

Question 10

what type of relationship is between bond prices and the interest rate that enables the money market to achieve equilibrium

Answer 10

inverse

Question 11

what are the causation chains for increasing or decreasing the money supply

Answer 11

increase > money surplus and people buy bonds > decrease in the interest rate

decrease > money shortage and people sell bonds > increase in the interest rate

Question 12

T or F inthe Keynesian model, changes in the supply of money affect interest rates. In turn, interest rates affect investment spending, aggregate demand, and finally, real GDP, employment and prices

Answer 12

True

Question 13

what is the Keynesian monetary policy transmission mechanism

Answer 13

change in the monetary policy > change in the money supply > change in interest rates > change in investment > change in the aggregate demand curve > change in prices, real GDP, and employment

Question 14

what is monetarism

Answer 14

the theory that changes in the money supply directly determine changes in prices, real GDP, and employment

Question 15

what is the equation of exchange?

Answer 15

an accounting identity that states the money supply times the velocity of money equals total spending

Question 16

what is the velocity of money?

Answer 16

the average number of times per year a dollar of the money supply is spent on final goods and services

Question 17

what is the quantity theory of money

Answer 17

the theory that changes in the money supply are directly related to changes in the price level

Question 18

T or F According to the quantity theory of money, in changes in the money supply must lead to a proportional change in the price level

Answer 18

True

Question 19

What is the monetarist prescription to avoid inflation and unemployment?

Answer 19

To be sure that the money supply is at the proper level

Question 20

T or F Monetarist advocate that the federal reserve increase the money supply by a constant percentage each year

Answer 20

True

Question 21

what is a subprime mortgage loan?

Answer 21

a home loan made to borrowers with an above-average risk of default

Question 22

how do Keynesians view the shape of the investment demand curve?

Answer 22

as a rather steep or vertical, so the crowding-out effect is insignificant

Question 23

how do monetarists view the shape of the investment demand curve?

Answer 23

as less steep or relatively flat, so the crowding-out effect is significant

Question 24

what are the Keynesians view of the 3 reasons people hold money ?

Answer 24

transactions demand, precautionary demand, speculative demand