Macro Economics Chapter 16 Power Point

Question 1

What will I learn in this chapter?

Answer 1

How the rate of interest is determined and what are Keynesian and monetarist policies.

Question 2

What is the transactions demand for money?

Answer 2

The stock of money people hold to pay everyday predictable expenses.

Question 3

What is the precautionary demand for money?

Answer 3

The stock of money people hold to pay unpredictable expenses.

Question 4

What is the speculative demand for money?

Answer 4

The stock of money people hold to take advantage of expected future changes in the price of bonds, stocks, or other nonmonies.

Question 5

How does a change in interest rates affect speculative demand?

Answer 5

As the interest rate falls, the opportunity cost of holding money falls, and people increase their speculative balances.

Question 6

What is the demand for money curve?

Answer 6

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

Question 7

How do interest rates affect the demand for money?

Answer 7

There is an inverse relationship between the quantity of money demanded and the interest rate.

Question 8

What gives the demand for money a downward slope?

Answer 8

The speculative demand for money at possible interest rates.

Question 9

What determines interest rates in the market?

Answer 9

The demand and supply of money in the market.

Question 10

Decrease in the interest rate leads increase in the quantity of _________ ___________.

Answer 10

money demanded

Question 11

Excess money demand leads to people selling _______ then prices fall and the interest rate _____.

Answer 11

• bonds - rise

Question 12

Excess money supply leads to people _______ bonds the bond prices ________and the interest rate _____.

Answer 12

• buying- rise- fall

Question 13

Why do bond prices fall as interest rates rise?

Answer 13

Bond sellers have to offer higher returns (lower price) to attract potential bond buyers, or else they will go elsewhere to get higher interest returns.

Question 14

Why do bond prices rise as interest rates fall?

Answer 14

Bond sellers are put in a better bargaining position as interest rates fall (higher price); potential buyers cannot go elsewhere to get higher interest returns so easily.

Question 15

How can the Fed influence the equilibrium interest rate?

Answer 15

It can increase or decrease the supply of money.

Question 16

Increase in the money ________ leads to money ________ and people ____ bonds which leads to a decrease the interest rate.

Answer 16

• supply - surplus- buy- decrease

Question 17

Decrease in the money _______ which leads to money ________ and people ______ bonds and ___________ the interest rate

Answer 17

• supply- shortage- selling- increasing

Question 18

In the Keynesian model, what do changes in the money supply affect?

Answer 18

Interest rates, which in turn affect investment spending, aggregate demand, and real GDP, employment, and prices.

Question 19

Change in the money supply leads to ________ __ _______ _______. which leads to Change in investment and leads to Change in the _______ ________ curve. Then Change in prices, real GDP, & __________.

Answer 19

• Change in interest rates.- aggregate - employment

Question 20

When will businesses make an investment?

Answer 20

When the investment projects for which the expected rate of profit equals or exceeds the interest rate.

Question 21

What is the classical economic view?

Answer 21

The economy is stable in the long run at full employment.

Question 22

How did the classical economists view the role of money?

Answer 22

They believed in the equation of exchange.

Question 23

What is the equation of exchange?

Answer 23

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

Question 24

What is the velocity of money?

Answer 24

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

Question 25

MV = PQ is worded how?

Answer 25

Money X Velocity = Price X Quantity

Question 26

What is monetarism?

Answer 26

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

Question 27

Monetarist Policy:Change in the quantity of money leads to Change in the ______ _______. which leads to Change in the _________ ______ curve then Change in prices, real GDP, & __________.

Answer 27

• money supply- aggregate demand - employment

Question 28

What is the quantity theory of money?

Answer 28

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

Question 29

What is the conclusion of the quantity theory of money?

Answer 29

Any change in the money supply must lead to a proportional change in the price level.

Question 30

Who are the modern monetarists?

Answer 30

Monetarists argue that velocity is not unchanging, but is nevertheless predictable.

Question 31

According to monetarists, how do we avoid inflation and unemployment?

Answer 31

We must be sure that the money supply is at the proper level.

Question 32

Who was Milton Friedman?

Answer 32

In the 1950’s and 1960’s, he was a leader in putting forth the ideas of the modern-day monetarists.

Question 33

What did Milton Friedman advocate?

Answer 33

The Federal Reserve should increase the money supply by a constant percentage each year to enhance full employment and stable prices.

Question 34

How do the Keynesians view the velocity of money?

Answer 34

Over long periods of time, it can be unstable and unpredictable.

Question 35

What is the conclusion of the Keynesians?

Answer 35

A change in the money supply can lead to a much larger or smaller change in GDP than the monetarists would predict.

Question 36

What is the crux of the Keynesian argument?

Answer 36

Because velocity is unpredictable, a constant money supply may not support full employment and stable prices.

Question 37

What is the conclusion of the Keynesian argument?

Answer 37

The Federal Reserve must be free to change the money supply to offset unexpected changes in the velocity of money.

Question 38

What are the main points of classical economics?

Answer 38

•The economy tends toward a full employment equilibrium•Prices & wages are flexible•Velocity of money is stable•Excess money causes inflation•Short-run price & wage adjustments cause unemployment•Monetary policy can change aggregate demand & prices•Fiscal policies are not necessary

Question 39

What are the main points of Keynesian economics?

Answer 39

•The economy is unstable at less than full employment•Prices & wages are inflexible•Velocity of money is unstable•Excess demand causes inflation•Inadequate demand causes unemployment•Monetary policy can change interest rates and level of GDP•Fiscal policy is effective through spending multiplier changes in aggregate demand

Question 40

What are the main points of the monetarists?

Answer 40

•The economy tends toward a full employment equilibrium•Prices & wages are flexible•Velocity of money is predictable•Excess money causes inflation•Short-run price & wage adjustments cause unemployment•Monetary policy can change aggregate demand & prices•Fiscal policies are not necessary

Question 41

What is the crowding-out effect?

Answer 41

Too much government borrowing can crowd out consumers and investors from the loanable funds market.

Question 42

What is the Keynesian view of the crowding-out effect?

Answer 42

The investment demand curve is rather steep or vertical, so the crowding-out effect is insignificant.

Question 43

What is the monetarist view of the crowding-out effect?

Answer 43

The investment demand curve is flatter or horizontal, so the crowding-out effect is significant.