Lecture set 3

Question 1

What does Md stand for?

Answer 1

nominal money demand

Question 2

What does Ms stand for?

Answer 2

Real money supply

Question 3

What does Md and Ms create together

Answer 3

The Money Market Equilibrium, MME.

Question 4

On what can monetary factors have an effect on in the short run?

Answer 4

R, R* and Ee, thus they also effect E

Question 5

On what can monetary factors have an effect on in the long run?

Answer 5

P that influence E and Ee.

Question 6

We assume that P are what in the short run?

Answer 6

Sticky

Question 7

Money is a type of asset that distinguish it from other assets in what way? 3

Answer 7

Medium of exchange
Unit of account
Liquid store of value

Question 8

The M1 money supply includes what?

Answer 8

Cash/currency and Demand deposits(means you can take out money when you want).

Question 9

What does the transactions and precautionary motive mean?

Answer 9

Means that money demand will be a function of both aggregate real income Y and aggregate price level P.

Question 10

What does the transactions motive specifically mean?

Answer 10

If income goes up, spending will go up thus Md goes up to spend more.

Question 11

What does the precautionary motive mean?

Answer 11

When prices increase, goods and services are more expensive to buy and demand for money increase.

Question 12

What does the portfolio motive mean?

Answer 12

If interest rate go up R, money demand will decrease, because there is no return on the money. If non-money assets like buildings go up in value, it is a more attractive asset to have and demand for money drops.

Question 13

The nominal demand for money is shown how?

Answer 13

Md=P x L(R,Y)

Question 14

Why is there a negative relationship betwen R and Md=

Answer 14

Because interest rate R is an opportunity cost of money. Y is held fix which implies that if income change the curve will shift. This because when Y goes up Md goes up because of the transaction and precautionary motive.

Question 15

What does the CB target today instead of Ms?

Answer 15

R, thus nominal Ms(?)

Question 16

If R is too low in the graph, what motive plays part then?

Answer 16

Portfolio motive in the X axis and transaction and precautionary motive in the Y axis

Question 17

What does overshooting mean in the long run?

Answer 17

Means that E increase, E is volatile because of sticky prices. In the short run nominal supply and real supply go up, expected inflation go up vecause we expect log runt prices to go up. Expected E, Ee go up because of expected fic prices. which drives up E, so we have two increases in E, thus overshooting.