Chapter 7

Question 1

what is M1? why is typically larger than the monetary base?

Answer 1

another defintion of money
M1 = currency + demand deposit
banks need to hold only a fractions of demand deposits as a reserve.
less tightly controlled by CB than the monetary base

Question 2

what are broader money aggregates?

Answer 2

interest bearing assets - not direct medium of exchange

Question 3

how does money demand relate to IR?

Answer 3

money demand decreases with interest rates and it increases with the volume of transactions

M/P = Y/ V(i)

Question 4

what is the opportunity cost for holding money?

Answer 4

the interest you lose

Question 5

whats seignorage?

Answer 5

revenue that the CB gets from increasing the supply of the monetary base
is a fraction of a % of GDP

Question 6

what does high inflation and unexpected inflation lead to? deflation or very low inflation?

Answer 6

HIGH
- costs of changing prices and distortions of the price system
UNEXPECTED
- random redistribution since nominal interest rate, tax and benefit system are all in nominal terms
LOW
- impedient to nominal wage cuts

Question 7

how can real money demand be expressed?

Answer 7

M/P = Y/ V(r^n + inflation)
higher inflation leads to a decrease in real money holdings

Question 8

what is the fisher effect? how is it illustrated?

Answer 8

i = r + inflation
where the nominal interest rate compensates for inflation

Question 9

what are the causes of hyper inflation? how does it begin? how does it accelerate?

Answer 9

when inflation is >= 50% per month
CAUSES
- excessive growth in money supply
- CB printing more money leads to price level rising when printing rapidly hyper inflation occurs

BEGINNING
- when gov isnt able to finance spending by tax revenue
- excess spending financed by debt soon no one will be willing to lend to the country anymore
ACCELERATION
- money printed to finance government spending
- delay between tax revenue and spending money reduces TR
- increases the budget deficit which leads to print more money
NEGATIVE CONTINUOUS CYCLE

Question 10

what characteristics do we give money in our model? whats it prime example?

Answer 10

medium of exchange
unit of account
controlled by central bank
doesnt yield interest
EG. CASH

Question 11

what is velocity? what happens if we take it as exogenous? whats the price level from this?

Answer 11

MV = PY
the money supply controlled by the central bank and production at natural level
P = MV/ Yn

Question 12

what is inflation? what does the rule of thumb for growth rates give?

Answer 12

rate of change of the price level
inflation = change in M/M + change in V/V - change in Yn/Yn

Question 13

what is the monetary base? why does it correspond closely to our concept of money? how can CB control it?

Answer 13

currency in circulation + banks claims on CB

all payments involve the use of the MB and the CB controls it by open market operations and lending to banks