ECON 102 Chapter Notes - Chapter 28: Monetary Policy, Capital Outflow, Canadian Dollar

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ECON 102 Full Course Notes

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Ch 28 money, interest rates, and economic activity. Present value (pv): the value now of one or more payments or receipts made in the future; often referred to as discounted present value. Demand for money: the total amount of money balances that the public wants to hold for all purposes. Monetary equilibrium: the situation in which the quantity of money demanded equals the quantity of money supplied. Monetary transmission mechanism: the channels by which a change in the demand for or supply of money leads to a shift of the aggregate demand curve. Long run money neutrality: the idea that a change in the supply of money has no long run effect on any real variables; it affects only the price level. If r1 = amount we receive in one year from now i = annual interest rate. Imagine a 3 year bond that promises to repay the face value of in.

Related Questions

Suppose households hold $0.30 in currency for every $1 they have as demand deposits (checking accounts). Also, banks hold 20% of their deposits as reserves.

A. If the Federal Reserve buys $10 of government bonds from banks, by how would would the following change (include a minus sign if the value falls)?
i. the money supply (M1)
ii. the monetary base

B. Instead of Bonds being sold, suppose that households chose to hold less in currency and more in demand deposits. Explain how that would change
i. Money supply (M1)
ii. the monetary base

viridianserval415

Suppose households hold $0.30 in currency for every $1 they have as demand deposits (checking accounts). Also, banks hold 20% of their deposits as reserves.

A. If the Federal Reserve system buys $10 of government bonds from banks, by how much would the following change (include a minus sign if the value falls)?

i. The money supply (MI)

ii. The monetary base

B. Instead of the bonds being sold, suppose that households chose to hold less in currency and more in demand deposits. Explain how that would change:

i. The money supply (MI)

ii. The monetary base

C. Suppose the money supply increases by 3%, the real GDP rises by 2%, and velocity is constant. By how much do prices rise? Explain why or show your work

cyanserval246

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.

apricotantelope345

ECON 102 Chapter Notes - Chapter 28: Monetary Policy, Capital Outflow, Canadian Dollar

ECON 102 Full Course Notes

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