Week 4

Question 1

What are the two reasons why conventional monetary policy fails

Answer 1

1) Funds can not be properly allocated during extreme negative financial crisis
2) Interest rate changes do not affect the economy anymore

Question 2

Define Money Supply and is it exgogenous or indogenous?

Answer 2

Total amount of monetary assets in an economy at a point in time and it is exogenous

Question 2

In graph is money supply vertical, horizontal or diagonal and why?

Answer 2

It is veritcal, this is because it shows it is not influenced by interest rate in the short term so it does not matter of interest rates fall or not

Question 3

What is the money market?

Answer 3

A segment in the finanical market where short term buying and selling of securities occur

Question 4

What is money demand?

Answer 4

Desire for households, firms, etc to hold cash and liquid assets over long terms assets

Question 5

What three factors are the reasons for money demand? Think kenysian theory of money demand

Answer 5

Specualtive Motive
Precautionary Motive
Transactionary Motive

Question 6

Is Money demand downward sloping, if yes why? If no why?

Answer 6

Yes it shows that as interest rate falls the demand for money (aka demand to not hold long term assests) rises , people want money and people will borrow more as it is cheaper

Question 7

4 Main targets of a central bank

Answer 7

1) Price Stability
2) Act as a lender of last resort
3) Hit inflation targets
4) Stability in the foreign exchange market