chp19

Question 1

what did Irving Fisher create?

Answer 1

equation of exchnage

Question 2

equation of exchnage

Answer 2

an equation which links nominal income to the quantity of money and velocity

Question 3

explain

Answer 3

money supply x velocity = price level x aggregate output/income

Question 4

what is PY

Answer 4

nominal income

Question 5

what does the equation of exchange tell us?

Answer 5

when we think about how the existing quantity of money is spent or transacted with, it is equal to nominal income

Question 6

what is derived from equation of exchange?

Answer 6

demand for money (quantity people chose to hold)

Question 7

explain

Answer 7

Md = money demanded

1/v is assumed to be a constant (written as k)

Question 8

what does equation of exchange tell us about inflation

Answer 8

doesn’t reflect inflation in the short-run, but does in long-run

Question 9

why is equation of exchange good at reflecting long-run inflation but not short-run inflation?

Answer 9

lags in economic adjustment

Question 10

government budget constraint

Answer 10

the idea that the government budget deficit is equal to government spending less tax revenue

Question 11

explain

Answer 11

DEF: government budget deficit
G: government spending
T: tax revenue

Question 12

explain

Answer 12

government budget deficit is then also equal to change in monetary base and change in government bonds

Question 13

liquidity preference theory

Answer 13

the idea that the demand for money is impacted by
transactions motive
precautionary motive
speculative motive

Question 14

transactions motive

Answer 14

the idea that the easier it is to carry out an exchange with varying forms of payment, the demand for money is affected

Question 15

precautionary motive

Answer 15

the idea that people may choose to hold onto money or save it because of “unknowingness” about the future

Question 16

speculative motive

Answer 16

the idea that people may choose to hold onto money for storing wealth

Question 17

dominated assets

Answer 17

the viewpoint that some assets (like currency and checkable deposits) would not be held in comparison to other assets that pay greater returns with limited risk

Question 18

inflation hedges

Answer 18

the viewpoint that some assets are worth holding over money because they are less affected by inflation

Question 19

liquidity trap

Answer 19

the idea that conventional monetary policy does not affect aggregate spending because changes in the money supply will not affect interest rates