Vecka 3 föreläsningar del 1

Question 1

Describe what you assume Short term?

Answer 1

• Constant price level.
• Increased Money supply lowers nominal interest rate.

Question 2

Describe what you assume in the Long run?

Answer 2

• Potential output is determined by the quantity of factors of production. (labour, Capital and tech-level.)
• The nominal interest rate (R) is determined by long-term levels of savings and investment and inflation expectations.
• Neither of them is affected in the long run by the size of the MS

Question 2

What is MS?

Answer 2

Money supply

Question 3

What happens in the Short run when Ms↑?

Answer 3

R(down) = currency depreciation (E up)

Question 4

What happens in the Long run when Ms↑?

Answer 4

P↑

Question 4

Is Real GDP affected by changes in Money Supply in the long term?

Answer 4

No , but The future expectations of the currency is affecting us today.

Question 5

What are Our best guesses on the economy in the long-term?

Answer 5

• Equilibrium in all markets, we never reach long-term equilibrium but we’re always moving towards it.
• Price level depends on money supply.
• Output equals Potential GDP, it does not depend on money supply or Price level.

Question 6

What does the Expectations for the future nominal exchange rate do?

Answer 6

• It Has impact on the nominal exchange rate already in the short term.
• There is “the monetary approach” and “the real exchange rate approach “ .

Question 7

What does The law of one Price say?

Answer 7

That in the absence of transport costs and trade barriers, the same product should have the same price in different markets. If this is not the case Prices or the exchange rate will change.

Question 8

What does the Purchasing power parity (PPP) theory apply?

Answer 8

The law of one price to the totality of all goods and services. According to the Purchasing power parity the Krona Price of the Swedish basket of goods will be equal to the krona price of the foreign basket.

Question 9

What are the Two variants of the PPP theory?

Answer 9

1. Absolute PPP
2. Relative PPP.

Question 10

What does the Absolute PPP indicate?

Answer 10

• That the exchange rate is given by the level of countries relative Price.
• It’s theoretically demanding and poorly aligned with reality because different countries may have different price levels.

Question 11

What does Relative Ppp indicate?

Answer 11

• That exchange rate changes are due to inflation differences.
• It is Less theoretically demanding and more realistic.
• Different countries can have different price levels BUT the Price level difference between them should be Constant overtime.

Question 12

What does The monetary approach explain?

Answer 12

Long-term nominal exchange rate by monetary factors alone.

Question 13

What happens if Ms/Ms* ↑ ?

Answer 13

It leads to E↑