ECON 1P92 Lecture Notes - Precious Metal, Commercial Bank, Barter

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8 Nov 2013

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ECON 1P92 Full Course Notes

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Relative prices and real gdp are determined only by real things (i. e. technology and preferences) Money is neutral: change in the money supply causes no change in real variable. Change in the money supply does lead to a proportionate change in the price level. Changed in money do generate changes in output an other real variables. Output is fixed, price level continues to increase. Changes in money and the price level are closely linked. *countries with high inflation rates often have higher rates of growth of the money supply. Money is a medium of exchange: acceptable as payment for goods and services. Without money, we would need something like a barter system: barter is inefficient, requires double coincidence of wants. *not a problem when general medium of exchange is used. Money is a store of value: without high inflation, money retains its value. Money is a unit of account: the unit of measure we use to keep our financial accounts.

Related Questions

The Federal Reserve expands the money supply by 5 percent:

a. Use the theory of liquidity preference to illustrate in a graph the impact of this policy on the interest rate.
b. Use the model of aggregate demand and aggregate supply to illustrate the impact of this change
in the interest rate on output and the price level in the short run.
c. When the economy makes the transition from its short-run equilibrium to its new long-run equilibrium, what will happen to the price level?
d. How will this change in the price level affect the demand for money and the equilibrium interest rate?
e. Is this analysis consistent with the proposition that money has real effects in the short run but is neutral in the long run?

ceruleanpig915

During the depression, the U.S central bank, the Federal Reserve, enacted policies that increased the money supply by 6%.

1) What happens to the level of output and the price level in the shor- run and in the long-run?

2) Assume that the velocity is constant, what are the percentage change of output and price level in the short run and long run? (Hint: use quantity theory of money).

3) What happens to unemployment in the short-run and long-run? (Hint: Okun's law can be summaries in the following equation: in unemployment rate =

% in real GDP )

4) What happens to the real interest rate in the short-run and long-run? (Hint: Use the model of real interest rate in Chapter 3, to see what happens when output changes)

amethystgnu546

Part 1

Evaluate whether each of the following statements is true or false. Explain your answer and provide a supporting rationale.

a.The short-run aggregate supply (SAS) curve slopes upward because households spend more as their incomes increase.

b.The long-run aggregate supply curve can never shift.

c.Either a decrease in the nominal money supply by the Federal Reserve, all else held constant or an increase in the price level, all else held constant, will shift the aggregate demand (AD) curve to the left.

d.The Keynesian portion of the short-run aggregate supply (SAS) curve would be relevant during a recessionary situation.

e.Stagflation occurs when the aggregate demand (AD) curve shifts out on the upward sloping portion of the short-run aggregate supply (SAS) curve.

Part 2

Evaluate whether each of the following statements is true or false. Explain your answer and provide a supporting rationale, using graphs to support your answer. You can create graphs by hand and take pictures and upload them with your answers, or you may use Word or Excel, and upload the file created by these software packages.

a.If the real money demand is greater than the real money supply, interest rates must rise to reach equilibrium in the money market as institutions sell bonds to obtain more money.

b.The federal government's control of the money supply, which influences interest rates, is the primary tool that policymakers use to impact the macroeconomy.

c.A decrease in the reserve requirement decreases the money supply because banks have fewer reserves.

d.The real money demand curve shows how households and businesses change their spending in response to changes in the interest rate.

e.Both an increase in the nominal money supply by the Federal Reserve and an increase in the price level will cause the real money supply curve to shift to the right.

yellowseal739

ECON 1P92 Lecture Notes - Precious Metal, Commercial Bank, Barter

ECON 1P92 Full Course Notes

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