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ECON 20B Lecture 20: Money, Interest, and Inflation

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School
UC-Irvine
Department
Economics
Course
ECON 20B
Professor
Lai Jiang

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18

ECON 20B Lecture Notes - Lecture 18: Money Market Fund, Federal Reserve System, Commercial Bank

20

ECON 20B Lecture 20: Money, Interest, and Inflation

21

ECON 20B Lecture 21: Aggregate Supply and Aggregate Demand

Document Summary

Econ 20b - lecture 20 - money, interest, and inflation. Real factors that are independent of the price level determine potential gdp and the natural unemployment rate. Investment demand and saving supply determine the amount of investment, the real interest rate and, alony with population growth, human capital growth, and technological change, determine the growth rate of real gdp. Money the means of payment consists of currency and bank deposits. Banks create money and the fed influences the quantity of money through its open market operations, which determines the monetary base and the federal funds rate. Here we explore the effects of money on the economy. The effects of money can be best understood in two steps: The effects of the fed"s actions on the short-term nominal interest rate. The long-run effects of the fed"s actions on the price level and the inflation rate. Quantity of money demanded - the amount of money that households and firms choose to hold.

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Related Questions

1. Which of the following is NOT a tool the Fed uses to manage the money supply?

A) open market operations

B) discount policy

C) deposit insurance

D) reserve requirements 0.4 points

 

2. The problem with barter economies is:

A) less time and trouble to trade as compared with a money economy.

B) that there may be a double coincidence of wants.

C) a banking system for trade to occur.

D) that there be a single coincidence of wants. 

 

3. If banks do not loan out all their excess reserves, then the real world multiplier is

A) smaller than 1/RR.

B) larger than 1/RR.

C) equal to 1/RR.

D) not related to 1/RR. 

 

4. If the Federal Open Market Committee wants to increase the money supply through open market operations, it will

A) buy U.S. Treasury Securities.

B) sell U.S. Treasury Securities.

C) increase the discount rate.

D) decrease the discount rate. 

 

5. M1 includes

A) currency in circulation, checking account balances at banks, the value of traveler's checks.

B) currency in circulation, savings accounts, checking account balances at banks.

C) currency in circulation, savings accounts, checking account balances at banks, travelers.

D) coins, savings account balances at banks, traveler's checks. 

 

6. Using the quantity equation, if the velocity of money grows at 5 percent, the money supply grows at 10 percent, and real GDP grows at 4 percent, then the inflation rate will be

A) 19 percent.

B) 15 percent.

C) 11 percent.

D) 6 percent.

 

7. According to the quantity theory of money, the inflation rate equals

A) the money supply minus real output.

B) real output minus the money supply.

C) the growth rate of the money supply minus the growth rate of real output.

D) the growth rate of real output minus the growth rate of the money supply.

 

8. Suppose that you sold a basketball ticket for the SEC tournament for $750. Assuming that you deposit the entire $750 in your bank and that the RR = 10%, Answer the following questions while also using the same assumptions in the book/lecture slide. Correct answers contain no decimals. Please report them as they are.

a) What is the total change in checking account deposits?

b) How much new money is created? (or what is the change in money supply given the above state conditions?) The total change in the money supply is Blank 2.

c) The amount of new money created in this example would be higher or lower than in the real world. The amount of money created this way would be Bank 3 than in the real world.

Question 1

The higher the capital utilization rate, the greater the depreciation rate.

True
False

Question 2

Higher capital utilization rates may raise the user costs of capital because higher utilization rates imply

operating at inconvenient times.
paying overtime to employees operating the machines.
operating when complementary services like transporters are unavailable or more expensive.
All of the above.

Question 3

If the rental price of capital increase, the capital utilization rate

increases.
decreases.
remains the same.

depends on whether the substitution rate is greater than the income effect

Question 4

The vacancy rate in the labor market is

the number of job openings divided by the number of unemployed people in the labor force.
the number of job openings divided by the number of workers in the labor force.
the ratio of open jobs to filled jobs.
the ratio of open jobs to the total number of jobs that employers want occupied.

Question 5

Unemployment can exist in a market clearing model if it takes some search time for workers to find jobs.

True
False

Question 6

A decrease in workers’ effective real incomes while they are unemployed will

lower the job finding rate and raise the expected duration of unemployment.
lower the job finding rate and the expected duration of unemployment.
raise the job finding rate and lower the expected duration of unemployment.
raise the job finding rate and the expected duration of unemployment.

Question 7

In the Barro model, the natural rate of unemployment is

positively related to the job separations rate.
zero.
fixed.
positively related to the job finding rate.

Question 8

If the interest rate increases, the real demand for money also increases

True
False

Question 9

Commodity money is money that has value because

of the intrinsic value of the commodity.
it is legal tender.
the government says so.
All of the above.

Question 10

High-powered money is

money held by business for investment.
total currency in circulation plus depository institution deposits at the Fed.
total currency in circulation.
government bonds held by the public and depository institutions.

Question 11

U.S. M1 money includes

currency held by the public.
checkable deposits.
traveler’s checks.
All of the above.

Question 12

U.S. M2 money includes

currency, time deposits, and government bonds.
savings deposits, small time deposits, and private bonds.
checkable deposits, savings deposits, and small time deposits.
retail money market mutual funds, small time deposits, and government bonds.

Question

Money is different from other assets like capital and bonds in that

money does not pay interest.
money has intrinsic value.
money is a better long term store of value.
All of the above.

Question

If a person’s income doubles, we expect their cash holdings to

double
more than double.
less than double.
decrease.

Question 15

Real money demand does not change when

nominal GDP changes.
the interest rate changes.
the price level changes.
All of the above.

Question 16

All else constant, the price level rises when the supply of money increases.

True
False

Question 17

If the nominal interest rate were to increase, then

money demand decreases and the price level increases.
money demand increases and the price level decreases.
the money supply and the price level would increase.
the money supply and the price level would decrease.

Question 18

Real money demand is a function of real GDP and the nominal interest rate.

True
False

Question 19

The real return on money is zero.

True
False

Question 20

If the expected inflation rate is 5% and the unexpected inflation rate is 4%, the actual inflation is

1%
9%
-1%
1.25%

Question 21

When the rate of growth of money is constant

the inflation rate equals the growth rate of money.
the nominal interest rate rises.
real money balances are declining.
All of the above.

Question 22

A decrease in the money growth rate in the market clearing model causes

a decrease in the nominal interest rate.
an increase in money demand.
a decrease in the price level.
All of the above.

Question 23

A decrease in the money growth rate in the market clearing model causes

an increase in the nominal interest rate.
an increase in money demand.
an increase in the price level.
All of the above.

Question 24

Under price level targeting the money supply becomes

neutral
endogenous
exogenous
predetermined

Q 25 During a recession, the interest rate falls tending to cause money demand to rise, but is at least partly offset by real GDP falling tending to cause money demand to fall.

True
False

Which of the following is NOT a tool the Fed uses to manage the money supply? A) open market operations B) discount policy C) deposit insurance D) reserve requirements 0.4 points Question 2 The problem with barter economies is that they require A) less time and trouble to trade as compared with a money economy. B) that there be a double coincidence of wants. C) a banking system for trade to occur. D) that there be a single coincidence of wants. 0.4 points Question 3 If banks do not loan out all their excess reserves then the real world multiplier is A) smaller than 1/RR. B) larger than 1/RR. C) equal to 1/RR. D) not related to 1/RR. 0.4 points Question 4 If the Federal Open Market Committee wants to increase the money supply through open market operations it will A) buy U.S. Treasury Securities. B) sell U.S. Treasury Securities. C) increase the discount rate. D) decrease the discount rate. 0.4 points Question 5 M1 includes A) currency in circulation, checking account balances at banks, the value of traveler's checks. B) currency in circulation, savings accounts, checking account balances at banks. C) currency in circulation, savings accounts, checking account balances at banks, traveler's D) coins, savings account balances at banks, traveler's checks. 0.4 points Question 6 Using the quantity equation, if the velocity of money grows at 5 percent, the money supply grows at 10 percent, and real GDP grows at 4 percent, then the inflation rate will be A) 19 percent. B) 15 percent. C) 11 percent. D) 6 percent. 0.4 points Question 7 According to the quantity theory of money, the inflation rate equals A) the money supply minus real output. B) real output minus the money supply. C) the growth rate of the money supply minus the growth rate of real output. D) the growth rate of real output minus the growth rate of the money supply 0.4 points Question 8 Suppose that you sold a basketball ticket for the SEC tournament for $750. Assuming that you deposit the entire $750 in your bank and that the RR = 10%, Answer the following questions while also using the same assumptions in book/lecture slide. Correct answers contain no decimals. Please report them as they are. a) What is the total change in checking account deposits? Total change in checking account deposits is Blank 1 . b) How much new money is created? (or what is the change in money supply given the above state conditions?) Total change in money supply is Blank 2 . c) The amount of new money created in this example would be higher or lower than in the real world. The amount of money created this way would be Blank 3 than in the real world.