Monetary Theory and Policy

Question 1

Demand for Money

Answer 1

relationship between interest rate (r) and how much money people want to hold

Question 2

When interest rate is low, people hold ______ money

Answer 2

more

Question 3

The Equation of Exchange

Answer 3

The quantity of money, M, multiplied by its velocity, V, equals nominal GDP, which is the product of Price level, P, and RGDP, Y,
OR
M x V = P x Y
M x V = PL x RGDP

Question 4

Velocity of Money

Answer 4

the average number of times per year each dollar is used to purchase final goods and services

Question 5

Velocity equation

Answer 5

V = (PxV) / M
P=Price level
V=velocity
m=quantity of money

Question 6

Quantity Theory of Money

Answer 6

if the velocity of money is stable, or at least predictable, changes in the money supply have predictable effects on NGDP

Question 7

demand for money shifts right when _________

Answer 7

Price level, RGDP, or both increase

Question 8

an increase in the supply of money reduces the interest rate, and _______, as well as,________

Answer 8

Increases investment

Boosting aggregate demand (increasing PL and RGDP)

Question 9

In the long run, a change in money supply affects price level, but______

Answer 9

not potential output