ECON 4550 Lecture Notes - Lecture 3: Opportunity Cost, Nominal Interest Rate, Shortage

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21 Sep 2017

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Chapter 3/15: money, interest rates, and exchange rates. Monetary factors affect the exchange rate by changing. The interest rate (r: a rise in the interest rate causes each individual in the economy to reduce her demand for money, aggregate money demand therefore falls when the interest rate rises. The price level (p) the price of a broad reference basket of goods and services in terms of currency reference basket includes the standard, everyday consumption: also less routine purchases such as medical care and legal fees. Real national income (y: when real gnp rises, more goods and services are being sold in the economy if p is the price level, r is the interest rate, y is real gnp, aggregate demand. If there is initially an excess supply of money, the interest rate falls, and if there is initially an excess demand, it rises: see class notes and graphs. An increase in the u. s. money supply lowers u. s. interest rates.

Related Questions

All the questions from "Output, Exchange Rates, Macroeconomic Policy, and Open-economy IS-LM-FX Model."

Please answer these questions completely. It is important to me.

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6. The TB (i.e., EX â IM) is part of the short-run spending equation. With sticky prices, what would be the effect on the TB with an increase (depreciation) of the home nation's exchange rate?

A. Consumers in the home nation would find it more expensive to buy domestic goods compared to foreign goods, and the trade balance would decrease.

B. Consumers in the home nation would cut back on both domestic and foreign goods and the trade balance would decrease.

C. Consumers in the home nation would increase spending on both domestic and foreign goods, and the trade balance would be unchanged.

D. Consumers in the home nation would increase spending on domestic goods and decrease spending on foreign goods, causing the trade balance to increase.

11. A shift to the left by the IS curve can be achieved by all of the following EXCEPT a(n):

A. decrease in government spending.

B. increase in taxes.

C. increase in the foreign interest rate.

D. decrease in future expected exchange rate Ee.

13. The LM curve will shift to the left, if there is a(n):

A. increase in money supply.

B. increase in interest rate.

C. decrease in money supply.

D. increase in output.

14. If taxes fall and foreign income falls, what will happen to output, ceteris paribus?

A. It will rise.

B. It will stay the same.

C. It will fall.

D. It is uncertain what will happen.

15. Using the IS-LM-FX framework, if we observe that income and interest rate both rise in the Eurozone, this could be the result of

A. contractionary monetary policy pursued by the European Central Bank.

B. expansionary monetary policy pursued by the Federal Reserve System (U.S. central bank).

C. a stock market crash in the Eurozone.

D. increases in government spending in the Eurozone.

18. Whenever U.S. government spending increases,

A. output will not change at all if the U.S. fixes the exchange rate of dollar against major currencies.

B. output will increase by a larger amount when dollar floats than when dollar pegs to other currencies.

C. output will increase by a smaller amount when dollar floats than when dollar pegs to other currencies.

D. output will not change at all since the U.S. adopts a flexible exchange rate.

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.

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ECON 4550 Lecture Notes - Lecture 3: Opportunity Cost, Nominal Interest Rate, Shortage

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