ECON302 Lecture Notes - Lecture 14: General Equilibrium Theory

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sangriagiraffe866

18 May 2016

School

University of Waterloo

Department

Economics

Course

ECON302

Professor

Nafeez Fatima

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Document Summary

Chapter ten: the demand for money and the price level. Bonds and ownership of capital are referred to as interest-bearing assets. Since these assets yield a higher rate of return than money, they are better as long-term stores of value. Households receive nominal labour income, wl, and nominal asset income, i(b + pk), in money. Households use money to buy consumption goods, pc, and to save, b + p k. Households can reduce their average money balance by incurring more transaction costs; expenses of time or goods related to the timing and form of various exchanges. The price level and the demand for money. If the price level, p, doubles along with the nominal wage rate, w, and the nominal rental price, r, household nominal income is twice as high but household real income is unchanged. In this circumstance, households would also want to double the nominal quantity of money, m.

Related Questions

There are many economic models to explain the macro-economies function. Adam Smith started the classic economic thinking with his laissez-faire theory. The classical foundation for the role of money supply in an economy started in the mid-1700s. In classic macroeconomics, money is used for transactions. If there is more money or less money in circulation then it means that the prices are higher or lower. The classic model dominated microeconomics and macroeconomics of 1800 and 1900. In the classic macroeconomic model, the role of money is that it is used for transactions. The classic role of money can be understood through the quantity theory of money. The quantity theory of money states that if there are changes in the price level, then there will be corresponding changes in the money supply. The equation for the quantity theory of money is: M * V = P * Q

In this equation,

M = Nominal money supply

V = Velocity of money

P = Average price level

Q = Quantity of goods and services sold

The average price times quantity of goods and services sold represents the nominal GDP. The velocity of money is the number of times a currency is spent during a year.

Say's Law states that supply creates its own demand. It means that the income that is derived from producing some goods by an individual, allows him to purchase goods produced by some other individual. Since everyone has a need to purchase goods, they will produce some goods to earn income and buy what they want. So, the product markets will always be in equilibrium.

Show an empirical study that tests the relative inflation and growth rates on the nominal exchange rates.

copperlouse565

1.The classical theory of inflation

A. Is also known as the quantity theory of money.

B.was developed by some of the earliest economic thinkers.

C.is used by most modern economists to explain the long-run determinants of the inflation rate.

D.All of the above are correct.

2.To explain the long-run determinants of the price level and the inflation rate, most economists today rely on the

A.quantity theory of money.

B.price-index theory of money.

C.theory of hyperinflation.

D.disequilibrium theory of money and inflation.

3.When the price level rises, the number of dollars needed to buy a representative basket of goods

A.increases, and so the value of money rises.

B.increases, and so the value of money falls.

C.decreases, and so the value of money rises.

D.decreases, and so the value of money falls

4.The supply of money is determined by

A.the price level.

B.the Treasury and Congressional Budget Office.

C.the Federal Reserve System.

D.the demand for money.

6.Economic variables whose values are measured in monetary units are called

A.dichotomous variables.

B.nominal variables.

C.classical variables.

D.real variables.

7.Economic variables whose values are measured in goods are called

A.dichotomous variables.

B.nominal variables.

C.classical variables.

D.real variables.

7.The classical dichotomy refers to the idea that the supply of money

A. is irrelevant for understanding the determinants of nominal and real variables.

B.determines nominal variables, but not real variables.

C.determines real variables, but not nominal variables.

D.is a determinant of both real and nominal variables.

8.According to the classical dichotomy, when the money supply doubles, which of the following also doubles?

A.the price level

B.nominal wages

C.nominal GDP

D.All of the above are correct.

9.Monetary neutrality implies that an increase in the quantity of money will

A.increase employment.

B.increase the price level.

C.increase the incentive to save.

D.not increase any of the above.

10.The velocity of money is

A.the rate at which the Fed puts money into the economy.

B.the same thing as the long-term growth rate of the money supply.

C.the money supply divided by nominal GDP.

D.the average number of times per year a dollar is spent.

11.If M = 4,000, P = 1.5, and Y= 6,000, what is velocity?

A.2.25

B.3.00

C.6.50

D.None of the above is correct.

12.According to the assumptions of the quantity theory of money, if the money supply increases by 5 per cent, then

A.nominal and real GDP would rise by 5 per cent.

B.nominal GDP would rise by 5 per cent; real GDP would be unchanged.

C.nominal GDP would be unchanged; real GDP would rise by 5 per cent.

D.neither nominal GDP nor real GDP would change.

13.The inflation tax refers to

A.the revenue a government creates by printing money.

B.higher inflation which requires more frequent price changes.

C.the idea that other things the same, an increase in the tax rate raises the inflation rate.

D.taxes being indexed for inflation.

14.The inflation tax falls most heavily on

A.those who hold a lot of currency and accounts for a large share of U.S. government revenue.

B.those who hold a lot of currency but accounts for a small share of U.S. government revenue.

C.those who hold little currency and accounts for a large share of U.S. government revenue.

D.those who hold little currency but accounts for a small share of U.S. government revenue.

15.The claim that increases in the growth rate of the money supply increase nominal interest rates but not real interest rates is known as the

A.Friedman Effect.

B.Hume Effect.

C.Fisher Effect.

D.None of the above is correct.

16.The nominal interest rate is 3 per cent and the inflation rate is 2 per cent. What is the real interest rate?

A.6 per cent

B.5 per cent

C.1.5 per cent

D.1 per cent

17.Which of the following helps to explain why the inflation fallacy is a fallacy?

A.Increases in the price level can be created by increases in money demand.

B.Nominal incomes tend to rise at the same time that the price level is rising.

C.As the price level rises, the value of a dollar falls.

D.Inflation only changes nominal variables.

18.The shoe-leather cost of inflation refers to

A.the re distributional effects of unexpected inflation.

B.the time spent searching for low prices when inflation rises.

C.the waste of resources used to maintain lower money holdings.

D.the increased cost to the government of printing more money.

19.Which of the following is an example of menu costs?

A.deciding on new prices

B.printing new price-lists

C.advertising new prices

D.All of the above are examples of menu costs.

20.Which of the following are U.S. taxpayers allowed to adjust for inflation for income taxes?

A.both interest in income and capital gains.

B.interest income but not capital gains.

C.capital gains but net interest income.

D.neither interest income nor capital gains.

21.You put money into an account and earn a real interest rate of 4 per cent. Inflation is 2 per cent, and your marginal tax rate is 20 per cent. What is your after-tax real rate of interest?

A.1.2 per cent

B.2.8 per cent

C.4.8 per cent

D.None of the above is correct.

22.Which of the following is correct? Inflation

A.impedes financial markets in their role of allocating resources.

B.reduces the purchasing power of the average consumer.

C.generally increases after-tax real interest rates.

D.is most costly when anticipated.

23.Wealth is redistributed from creditors to debtors when inflation is

A.high, whether it is expected or not.

B.low, whether it is expected or not.

C.unexpectedly high.

D.unexpectedly low.

amberdinosaur553

QUESTION 46

When the Fed buys a U.S. bond in the open market

		its action has no effect on the total reserves or the money supply because the check it writes increases reserves at one bank but they fall at another.
		its action expands total reserves and the money supply.
		its action contracts total reserves and the money supply.
		total reserves increase by the amount of the purchase but the money supply stays the same.

1.11 points

QUESTION 47

When the Fed sells government securities,

		reserves increase, leading to a decrease in the money supply by an amount more than the sale of the government securities.
		reserves decrease, leading to a decrease in the money supply by an amount more than the sale of the government securities.
		reserves increase, leading to a increase in the money supply by an amount more than the sale of the government securities.
		reserves decrease, leading to a increase in the money supply by an amount more than the sale of the government securities.

1.11 points

QUESTION 48

The maximum potential money multiplier is equal to

		the reserve ratio.
		one minus the reserve ratio
		the inverse of the required reserve ratio.
		the number of dollars on reserve.

1.11 points

QUESTION 49

The potential money multiplier gives us

		the growth in the money supply when income increases.
		the growth in real national income when the money supply increases.
		the maximum potential change in the money supply due to a change in income.
		the maximum potential change in the money supply due to a change in reserves.

1.11 points

QUESTION 50

An increase in the reserve ratio

		increases the money multiplier.
		will cause banks to make more loans.
		has an expansionary effect on the money supply.
		has a contractionary effect on the money supply.

1.11 points

QUESTION 51

The Federal Deposit Insurance Corporation insures

		banks against lawsuits.
		the deposits held in member banks.
		the deposits held in the Fed.
		the federal funds market.

1.11 points

QUESTION 52

Bank runs are a possibility because

		in difficult times people want currency instead of demand deposits.
		the FDIC is inefficient.
		banks do not keep enough reserves to cover all their depository liabilities.
		bankers are often poor businesspeople.

1.11 points

QUESTION 53

The manner in which FDIC deposit insurance is set up in the United States encourages banks to

		make riskier loans than they otherwise would.
		reject some loans that probably would be profitable.
		maintain excess reserves that are too great.
		be too conservative in their lending practices.

1.11 points

QUESTION 54

The Federal Deposit Insurance Corporation

		discourages banks from engaging in excessive risk taking.
		was established after the Panic of 1907.
		only insures deposits in money-center banks.
		increases the stability of the banking system by reducing the likelihood of bank runs.

1.11 points

QUESTION 55

What are the two features of money that distinguish it from all other goods in the economy?

		Money is government issued and it is redeemable for gold or silver.
		Money is part of every barter transaction and it is divisible.
		Money is accepted as a medium of exchange and it is the common unit of account used to express prices.
		Money is a common unit of account and it is also can be traded for other currencies at a guaranteed exchange rate.

1.11 points

QUESTION 56

Holding money to meet unplanned expenditures and emergencies is known as

		asset demand.
		precautionary demand.
		aggregate demand.
		transactions demand.

1.11 points

QUESTION 57

When people want to hold money to make regular planned expenditures, this is

		the transaction demand for money.
		the spending demand for money.
		the asset demand for money.
		the precautionary demand for money.

1.11 points

QUESTION 58

When interest rates rise, the transactions demand for money usually

		decreases.
		increases.
		decreases initially and then increases to the original position.
		does not change.

1.11 points

QUESTION 59

As nominal Gross Domestic Product (GDP) rises, the transactions demand for money

		increases, and the money demand curve shifts to the right.
		remains constant, and the money demand curve remains the same.
		decreases, and the money demand curve shifts to the left.
		increases, and the money demand curve shifts to the left.

1.11 points

QUESTION 60

One of the economic costs of holding currency is that

		it fulfills no precautionary role.
		it fulfills no transactions role.
		it earns no interest income.
		its real value always increases.

blacktrout920

ECON302 Lecture Notes - Lecture 14: General Equilibrium Theory

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