ECON 310 Study Guide - Final Guide: European Central Bank, Bretton Woods System, Reserve Currency

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ECON 310 Full Course Notes

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If a(cid:374) assets" (cid:396)isk (cid:396)ises (cid:396)elati(cid:448)e to alte(cid:396)(cid:374)ati(cid:448)e assets, its (cid:395)ua(cid:374)tit(cid:455) de(cid:373)a(cid:374)ded will fall: liquidity relative to alternative assets is positively related to the quantity de(cid:373)a(cid:374)ded of that asset . Asset is liquid if the market in which it is traded has many buyers and sellers. The more liquid an asset is relative to alternative assets, its quantity. Quantity demanded for bonds increases when price goes down (and interest rate goes up) Quantity supplied for bonds increases when price goes up (and interest rates go down) Market equilibrium/market-clearing point: when quantity of bonds demanded equals quantity of bonds supplied. Excess supply: when quantity of bonds supplied exceeds quantity of bonds demanded: causes price of bonds to fall to equilibrium price. Excess demand: quantity of bonds demanded exceeds quantity of bonds supplied: causes price of bonds to rise to equilibrium price. Asset market approach: emphasizes stock of assets, rather than flows, in determining asset prices.

Related Questions

Problem 2 (15 points)

Consider an economy with five assets: 1) Cash 2) Checking Accounts 3) Savings and Money-Market Accounts 4) Bonds 5) Stocks. M1 includes asset classes 1 and 2, and M2 is the sum of M1 and asset class 3. All else being equal, how would each of the following changes affect demand for M1? And for M2? Explain.

a) The stock market crashes, and investors who were previously excited about prospective gains now view it as too risky.

b) Authorities intensify the fight against street crime, leading to more arrests and convictions for robbery. As crime rates fall, people feel safer holding cash.

c) Banks introduce overdraft protection, under which funds are automatically transferred from savings to checking as needed to cover checks.

d) Due to an increase in inflation expectations, the average interest rate on bonds rises from 3% to 6%.

e) The government introduces deposit insurance, guaranteeing checking, and savings deposits in the event that there are depositor runs and banks fail.

Hint: Each change in a-e makes one asset more (less) attractive by raising (lowering) its return, liquidity, safety, or another desirable characteristic of the asset. You need to identify which asset's attractiveness has increased (decreased) and will thus absorb more (less) funds. As agents change their portfolios, there may be several possibilities regarding where funds come from (flow to). Thus, different answers may be correct, as long as you write a sentence explaining the move you have in mind. The emphasis of the question is on demand. That is, you just need to think through how an individual would reallocate funds between different available assets. Do not try to guess further equilibrium effects, i.e., do not worry about what would happen to prices and other behaviors that might follow if everyone in the economy did this move. That is interesting but beyond the scope of this problem. Also, assume that these are ceteris paribus changes, i.e., other factors do not change.

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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 workersâ 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

zero.

fixed.

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.

travelerâs 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 personâs income doubles, we expect their cash holdings to

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%

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

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

ECON 310 Study Guide - Final Guide: European Central Bank, Bretton Woods System, Reserve Currency

ECON 310 Full Course Notes

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