Final Exam

Question 1

In the Equation of Exchange, What is constant in the short run

M x V = P x Q

Answer 1

V is constant in the short run.

Question 2

What value is the Inflation rate in the

M x V= P x Q

Answer 2

P is the inflation rate

Question 3

What is the inflation rate equation from the
M x V = P x Q

and why

Answer 3

Inflation rate = Growth rate in money supple - growth rate in real GDP

P= M - Q

Because velocity is constant

Question 4

What is GNP

Answer 4

Gross National Product is the value of all goods and services produced in 1 year by labor and property supplied by the citizens of a country.

Question 5

Crowding Out

Answer 5

describes the effect of a government budget deficit on investment spending

-when increased interest rates lead to a reduction in private investment spending such that it dampens the initial increase of total investment spending.

Question 6

Stagflation

Answer 6

when there is high inflation (high prices) and high employment

Question 7

Demand pull inflation

Answer 7

When aggregate demand outpaces aggregate supply

Question 8

Main cause of inflation

Answer 8

Money supply grows faster than real GDP

Too much money to buy few goods and services

Question 9

What causes a movement along the MD

What happens when it increases

Answer 9

Interest rates

High interest rate mean low money demand (people keep less cash)

Low interest rates mean high money demand (people keep more cash)

Question 10

What causes MD to shift

and what happens when they increase.

Answer 10

Price level and Income

Increase in P = MD increase (you need to hold more cash)

Increase in Income = increase in MD

Question 11

In an expansionary monetary policy MS

Answer 11

MS increases

Question 12

What does the BOC do in an expansionary monetary policy to affect the MS

Answer 12

• Buys bonds
• decrease reserve ration
• decrease target overnight rate

Question 13

What does the BOC do in a contractionary monetary policy to the MS

Answer 13

MS decreases

• BOC sells bonds
• target overnight rate increases
• reserve ration increases

Question 14

What does the MS curve graph look like

Answer 14

Interest and Qm on the Y and X axis and its a straight line

Question 15

What does the D curve and graph look like

Answer 15

Interest and Qm on the Y and X on a diagonal sloping down.

Question 16

What happens when bank rate decreases

Answer 16

It is less costly to borrow from the central bank, so banks keeps less reserves and gives more loans

MS increases

Question 17

What happens when the price level increase

Answer 17

Increase in the MD

Question 18

What type of policy do you use to close a recessionary gap and what does this do to the M_

Answer 18

use an expansionary Monetary policy

Increasing the MS

Question 19

What does the Goods market curve graph look like (hint it has LRAs and SRAs and AD)

Answer 19

P and Y on the Y and x axis AD sloping down LRA straight line and SRA sloping up

Question 20

What type of policy do you use in an inflationary gap and what does this do to the money supply

Answer 20

Contractionary monetary policy and it decreases the MS

Question 21

What does the phillips curve tell us

Answer 21

It shows us an inverse “negative” relation between inflation rate and unemployment rate in the short run.

Increasing one decreases the other.

Question 22

Balance of Payment

Answer 22

Record that summarizes all international transactions of a country with the rest of the world during a certain period

Question 23

What does the credit component do

Answer 23

Records any transaction that brings money to our economy

Question 24

What does the debit component do

Answer 24

Records the money that goes out

Question 25

Where are the capital inflows and outflows recorded

Answer 25

Capital inflows are recorded in the credit side

capital outflows are recorded in the debit side

Question 26

what is recorded in the current account

Answer 26

grants and aid, and investment income

Question 27

What is recorded in the capital account

Answer 27

loans and direct and indirect investments

Question 28

Any transaction that brings money into the country is recorded where

Answer 28

credit side

Question 29

Any transaction that takes money out of the country is recorded where

Answer 29

in the debit side.