Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

principles of economics > money and monetary policy > Flashcards

money and monetary policy Flashcards

1
Q

what is the exchange rate?

A

it is the price of one unit of foreign currency in terms of the domestic currency

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

what are the functions of money?

A

1) money as a medium of exchange
2) money as a store of value
3) money as a unit of account
4) standard of deferred payment

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

what is the transactions demand for money?

A

the money held to cover routine expenditures

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

what is a flow variable ?

A

a flow variable is measured over a period of time

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

what are examples of flow variables?

A

income, consumption and exports

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

what is a stock variable?

A

a stock variable is measured at a point in time

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

what are examples of a stock variable?

A

money supply, the number of workers and the capital stocl

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

what does the consumers demand for money depend on and why?

A

1) the demand for money increases when income increases - this is due to the fact that consumers have a marginal propensity to consume, so any increase in income leads to an increase in consumption and as most goods required money in the transaction the demand for money increases
2) the demand for money decreases when the interest rate increases- this is due to the fact individuals will prefer to keep their money in the bank rather than in purse will generate greater interest payments.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

why might going on too many trips actually result in a decrease in total income

A

this is because going to the bank is not free so although you may generate greater interest income the shoe leather costs involved with travelling to the bank will result in overall decreased income

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

what is a simple money demand function?

A

L = kY - hi where L is the demand for money, Y is income , i is the interest rate

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

what is the precautionary demand for money?

A

it is the wealth held in the form of money for the purpose of covering unexpected expenditures

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

how is the precautionary demand for money related to income?

A

the precautionary demand for money increases when the incomes increase. they are positively related

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

how is the precautionary demand for money related to the interest rate?

A

it is negatively related to the interest rate as the opportunity cost of holding money increases when the interest rate increases

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

what is the speculative demand for money?

A

it is wealth held as money at times when other assets are considered excessively risky

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

what is the risk premia?

A

it is the difference between the risk free interest rate and the expected return on an alternative, risky asset

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

how important is the speculative demand for money?

A

it depends on the confidence at the time. in normal times it can safely be ignored however during times of crisis it can come to center stage

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

what is the formula for the money supply under money supply targeting?

A

the money supply is equal to the optimal money supply as the central bank is able to set it to its preferred value. it does not depend on the interest rate. M = M*

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

how is the money supply drawn graphically under money supply targeting?

A

it is a vertical line

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

how does raising or lowering the money supply affect the curve?

A

it will shift the curve right for a raise and left for a decrease

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

is the demand for money L a real variable?

A

yes it is a real variable as the demand for money L depends on the real income and the interest rate. if they are real then the demand for money is also real

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

is the supply of money M a real variable?

A

no the money supply is not a real variable

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

what is the equillibrium condition for the money market?

A

the real demand = the real supply
L =M / P where P is the price level

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

how many interest rates clear the market for money?

A

there is only one interest rate. if the interest rate is greater than the individuals economize on their holdings and there is excess supply. if interest rate is too low then there is excess demand

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

what occurs to the equillbrium position in the money market when there is a rise in income.

A

the increase in income will increase the demand for money shifting the demand curve to the right causing an increase in the interest rate assuming the money supply is fixed

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
Q

what is the LM curve?

A

the LM identifies the combinations of income and the interest rate for which the demand for money equals the money supply.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
26
Q

what is kept constant for the LM curve?

A

the money supply is fixed for any given LM curve

27
Q

what are the axis for the LM curve?

A

the y axis is the interest rate and the x axis is the income

28
Q

what is the algabraic expression for the LM curve and how is this derived?

A

i = (k/h) x Y - (1/h) M*
where i is the interest rate, Y is the income and M is optimal money supply. this equation is formed by the combination of L=M and the equations for L and M

29
Q

what factors will shift the LM curve?

A

any factors that changes the real money supply or demand for money. these will include a rise in the nominal supply of money or a rise in inflation which affect real supply of money. the factors which affect the demand for money will be the interest rate and the income

30
Q

when the central bank targets inflation rather than the money supply what does the money supply look like on the graph?

A

the money supply curve is horizontal. this is because the central bank are willing to operate at any money supply to keep the interest rate constant

31
Q

what is the horizontal money supply curve called and why?

A

the horizontal money supply curve fufills the property L =M so we call it the lm curve. this must be lowercase

32
Q

how can you move the lm curve?

A

through monetary policy by changing the targeted interest rate

33
Q

what is the consumption spending dependent on?

A

the current income and the expected future income

34
Q

what is investment depend on?

A

the expected future income and the interest rate

35
Q

what is the simple consumption function?

A

C = cY

36
Q

what is the simple investment function?

A

I = I* - bi

37
Q

what is the real exchange rate?

A

the ratio between the price of a bundle of goods abroad and at home multiplied my the nominal exchange rate

38
Q

what is the purchasing power parity?

A

the purchasing power parity denotes the exchange rate that equates prices abroad and at home in the domestic currency

39
Q

what occurs if the real exchange rate falls below the purchasing power parity?

A

this will mean that it is cheaper to buy imported goods.

40
Q

what is the equation of the import function?

A

IM = (m1 x Y) - (m2 x R) where Y is income and R is the real exchange rate

41
Q

what is the equation of the export function?

A

EX = (x1 x Yworld) + (x2 x R) where Yworld is the world income and the R is the real exchange rate

42
Q

what is the equation for the real exchange rate?

A

( E x Pworld) / P where E is the nominal exchange rate , Pworld is the price level of world and P is domestic price level

43
Q

what is the IS curve?

A

the is curve shows the combinations of income and the interest rate for which the aggregate expenditure equals income. its name derives from the fact that in an economy with no government and no trade with other countries, the required balancing of leakages and injections obtains I = S ( total investment = total savings)

44
Q

what is the equation of the IS curve?

A

i = - [ (1- c + m1)/(b)] x Y + [(X2 + m2)/b] x R + [ ( I + G + X1 x Yworld)/ b] where Y is the income, R is the real exchange rate, I is investment and G is government spending.

45
Q

what shifts the IS curve?

A

the IS curve shifts upwards if there is an increase in the real exchange rate, increase in government spending and an increase in world income.

46
Q

what is fiscal policy?

A

it manipulates government spending and taxes to achieve policy goals such as a rise in income

47
Q

what does the slope of the IS curve depend on?

A

it depends on the marginal propensity to consume and also the marginal propensity to import. the larger the marginal propensity to consumer the flatter the line.

48
Q

how does the length of the period of the income increase affect the gradient of the IS curve?

A

if the income increase is considered permanent then the gradient will be flatter but if it is only temporary then it will be a lot steeper.

49
Q

what is the formula for the global economy IS curve?

A

i = [(1-c)/b] x Y + [(I* + G)/b]

50
Q

how does the global economy is curve compare to the national economy IS curve?

A

1) the global economy IS curve is much simpler- there are fewer leaks and injections so everything determines net trade is not important ie exchange rate, foreign income and Marginal propensity to import
2) the curves both have negative slope which is due to the investment behaviour which is the same for the global and national economy versions.
3) the global IS curve is flatter - this is due to lower leakages out of the circular flow due to lack of imports so the multiplier is larger.

51
Q

why is it appropiate to combine the LM and IS curves

A

it is because both the IS and LM curve show combinations of interest rates and income levels that render the market under consideration in equilibrium. it creates a global economy comprising off the goods and money market

52
Q

how many points on the LM IS curve where the global economy is in equillibrium

A

only one point

53
Q

what occurs when the goods market alone is in equilibrium but the money market is not?

A

if at the level of income the interest rate is too high then the money market wont be cleared. the demand for money is too low and therefore there is excess supply. this will drive down the interest rate
if the interest rate is too low then the demand for money will be too high and outstrip supply then the interest rate will rise.

54
Q

what will occur when the goods market alone is in equilibrium?

A

if at a level of income, the interest rate is too high to clear the money, then the demand for money will be too low and there will be excess supply. this will result in the interest rate decreasing
if at the level of income the interest rate is too low, then the demand for money will be too high for supply to fulfil so the interest rate will increase

55
Q

what will occur when the money market alone is in equilibrium?

A

if at an interest rate, the income level is too high to permit a goods market equilibrium then firms will be producing more than consumers want to buy. responding to the signal of insufficient demand, firms will cut down production making income fall
if the interest rate means the income is too low then then the demand will exceed supply so then there will be a rise in the interest rate to decrease demand.

56
Q

what is monetary policy?

A

monetary policy manipulates the money supply or interest rate to achieve policy goals such as a rise in income

57
Q

what occurs to the economy when the money supply increases and how can it be represented graphically on the IS model?

A

the LM curve will shift to the right when the money supply increases. at the old equilibrium there will be now be excess supply of money. as individuals do not want to hold that excess money at that income the interest rate will be driven down. this will make investment cheaper so planned investment increases and income also increases. this will occur until a new equilibrium occurs at a lower interest rate and higher income

58
Q

what determines the sucess of the monetary policy?

A

the ability for a change in the money supply to drive down the interest rate and a fall in interest rate to stimulate investment

59
Q

what occurs to the economy when there is a rise in government spending?

A

the IS curve will shift to the right. this will lead to excess demand in the goods market due to the additional demand for goods by the government. to regain equilibrium there must either be an increase in the interest rate to prevent investment by firms or there will have to be an increase in productivity of firms raising Y. the new equilibrium will be at a greater income and greater interest rate.

60
Q

how does the economy reach a new macroeconomic equilibrium after fiscal policy of increased government spending?

A

as G has been raised while the economy is still at Y then the firms experience an increase in demand which they cannot fulfil so they increase production which raises income. the increase in income means there will be a rise in the demand for money but the banks cannot supply this so therefore they raise interest rates. the rise in income and interest rate drive the economy towards a new equilibrium. the is curve is the combination of the income and interest rates where the goods supplied equal the goods demanded

61
Q

what is the crowding out effect?

A

it refers to the phenomenom that an increase in one category of demand goes at the expense of a reduction in some other component of demand such as a rise in government spending increases the interest rate which therefore leads to a drop in investment

62
Q

in what situation will there be no crowding out?

A

if the is curve was vertical then we will experience the full multiplier effect as investment will not be responsive to a change in the interest rate.
there is also no crowding out when the government uses interest rate targetting

63
Q

what is the formula for the IS-LM government spending multiplier?

A

1/[1- c + ( b x k / h) ]

principles of economics (22 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions