ECON 1BB3 Chapter 14: ECON 1BB3- Chapter 14

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taupemole479

18 Jan 2019

School

McMaster University

Department

Economics

Course

ECON 1BB3

Professor

Bridget O' Shaughnessy

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ECON 1BB3 Full Course Notes

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Chapter 14- monetary theory and policy in an open economy. Demand for money- the relationship between the interest rate and how much money people want to hold. **remember that money (a stock variable) is not the same as income (a flow variable) ** The demand for money- the demand for money is rooted in money"s role as a medium of exchange. But it is also a store of value. Money demand and interest rate- when the market interest rate is low, the cost of holding money (maintaining liquidity) is low, so more people hold their wealth in the form of money. When the interest rate is high, the cost of holding money is high, so people hold less of their wealth in money and instead invest it in other financial assets that pay higher interest. If either increases, the demand for money increases, as reflected by a rightward shift of the money demand curve.

Related Questions

A. Match the correct motive (Precautionary Demand for money / Speculative Demand for money / Transactional Demand for Money) for holding money to the following definitions:

1. The stock of money people hold to take advantage of future changes in the prices of financial assets other than money.

2. The stock of money people hold to pay unpredictable expenses.

3. The stock of money people hold to pay everyday predictable expenses.

B. Identify the motive for holding money in the following scenario:

Musashi moves to a smaller apartment. Because of the lower monthly rent, he places a larger share of funds from his paycheck in a retirement fund and a smaller share in his savings account. This is an example of a decrease in Musashi's ____________________ demand for money.

C. Complete the following statement about the relationship between the interest rate and speculative balances.

As the interest rate rises, the opportunity cost of holding money _______________ and people ______________ their speculative balances.

blackcaribou48

1. Match the correct motive (Precautionary, Speculative, or Transactions) for holding money to the following definitions.

Definition
The stock of money people hold to pay unpredictable expenses
The stock of money people hold to take advantage of future changes in the prices of financial assets other than money
The stock of money people hold to pay everyday predictable expenses

2. Identify the motive for holding money in the following scenario.

Daesun moves to a smaller apartment. Because of the lower monthly rent, he places a larger share of funds from his paycheck in a retirement fund and a smaller share in his savings account. This is an example of a decrease in Daesun's (Precautionary, Speculative, or Transactions) demand for money.

Complete the following statement about the relationship between the interest rate and speculative balances.

3. As the interest rate falls, the opportunity cost of holding money (rises, falls), and people (decrease, increase) their speculative balances.

brownserval393

Choose the correct answer from the brackets:

A)The demand for money is mainly influenced by three variables: r (the short-term interest rate), Y (real GDP), and P (the aggregate Price level). Suppose r rises, but Y and P are unchanged. What happens to the quantity of money demanded?

r is both the opportunity cost of holding money and the reward for holding bonds. Thus, an increase in r causes people to want to hold (more/less ) of their wealth in the form of money and ( more/less) in the form of bonds to take advantage of the higher interest rate.

Suppose real income (Y) rises while the quantity of money in the economy stays the same. What happens to money demand?

The supply of money does not automatically rise when the production of real goods and services (Y) rises. However, the collective demand for money by firms and households does rise. To get this money firms and households attempt to (buy more/ sell some of their /more /less bonds).

Thus, an increase in Y causes people to want to hold (buy more /sell some of their / more /less) of their wealth in the form of money and (buy more / sell some of their / more / less ) in the form of bonds.

C)Suppose the price level (P) rises, but Y and r are unchanged. What happens to money demand?

If Y is unchanged, people will want to buy the same amount of goods and services as before. However, since P is higher, they will need (more / less) money to do so.

Hence, an increase in P causes people to want to hold (more / less) of their wealth in the form of money and (more / less) in the form of bonds.

purplesardine140

ECON 1BB3 Chapter 14: ECON 1BB3- Chapter 14

ECON 1BB3 Full Course Notes

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