ECON 105 Chapter 11: ECON 105 - txt. 11

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ultramarinetortoise293

12 Nov 2016

School

Simon Fraser University

Department

Economics

Course

ECON 105

Professor

Junjie Liu

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ECON 105 Full Course Notes

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Money supply, money demand, and monetary equilibrium: supply and demand determines the value of money. The demand for money represents how much wealth people want to hold in liquid form. A higher price level increase the quantity of money demanded. In the long run, the overall level of prices adjusts to the level at which the demand for money equals the supply. A monetary injection shifts the curve to the right. Quantity theory of money: a theory asserting that the quantity of money available determines the price level and that the growth rate in the quantity of money available determines the in ation rate. The immediate effect of a monetary injection is an excess supply of money. Saturday, november 5, 2016: people try to get rid of this excess money by: Make more loans by buying bonds or depositing the money into bank account. The injection of money increases the demand for goods and services.

Related Questions

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

As we observed in this chapter, central banks, rather than purposefully setting the level of the money supply, usually set a target level for a short-term interest rate by standing ready to lend or borrow whatever money people wish to hold at that interest rate. (When people need more money for a reason other than a change in the interest rate, the money supply therefore expands, and it contracts when they wish to hold less.)

Does the situation change if the central bank raises the interest rate when prices are high, according to a formula such as R - R₀ = a(P - P₀), where a is a positive constant and P₀ a target price level?

Question 1. (0.1 pt) According to the wealth effect, a higher price level will (decrease, increase)

the number of goods and services demanded. (Circle the correct answer for each.)

Question 2. (0.2 pt) If the central bank wants to expand aggregate demand, it can (decrease, increase)

the money supply, which would (decrease, increase) the interest rate.

(Circle the correct answer for each.)

Question 3. (0.2 pt) Monetary policy that contracts the money supply, will (decrease, increase) the

interest rate causing the aggregate demand curve to shift (in, out).

(Circle the correct answer for each.)

Question 4. (0.7 pt) The Federal Reserve contracts the money supply by 5 percent.

(Make sure to label your axes.)

a. ) Use the supply of money and the demand for money diagram to illustrate 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.

Question 5 . (0.8 pt) Explain how each of the following developments would affect the supply of money,

the demand for money, and the interest rate. Illustrate your answers with diagrams.

(Make sure to label your axes.)

a. ) The Fed's bond traders sell bonds in open-market operations.

b. ) An increase in credit-card availability reduces the cash people hold.

c. ) The Federal Reserve reduces banks' reserve requirements.

d. ) Households decide to hold more money to use for holiday shopping.

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ECON 105 Chapter 11: ECON 105 - txt. 11

ECON 105 Full Course Notes

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