ECO100Y5 Chapter Notes - Chapter 15: Price Level, Aggregate Demand, Overnight Rate

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19 Mar 2016

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Non-monetary assets are assets that are not made up of money, nor function as money. Short-term interest rates are the interest rates on financial assets that mature within less than a year. Long-term interest rates are interest rates on financial assets that mature a number of years in the future. The money demand curve shows the relationship between the interest rate and the (nominal) quantity of money demanded. One for example, is the introduction of chequable savings accounts that pay interest has reduced the opportunity cost of holding funds in chequing accounts, leading to a ruse in the demand for money. According to the liquidity preference model of the interest rate, the interest rate is determined by the supply and demand for money. The money supply curve shows how the quantity of money supplied varies with the interest rate. The boc can move the interest rate through open-market operations that shift the money supply curve.

Related Questions

According to the interest-rate-based monetary policy transmission mechanism, an increase in the money supply generates:

a. lower interest rates, which causes an increase in planned real investment spending and an increase in aggregate demand.

b. spending on consumer goods and services directly, which causes an increase in aggregate demand.

c. an increase in nominal GDP and a change in the price level, but no change in real GDP.

d. an increase in aggregate supply since the supply of money is part of aggregate supply.

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In response to a negative supply shock, the government decreases taxes. The most likely result of the government's tax decrease is:

	a decrease in unemployment and a decrease in the aggregate price level.
	a decrease in unemployment and an increase in the aggregate price level.
	an increase in unemployment and an increase in the aggregate price level.
	an increase in unemployment and a decrease in the aggregate price level.

If the aggregate price level rises, holding everything constant, consumers will:

	demand less aggregate output at all price levels resulting in a shift right of the AD curve.
	find their purchasing power has increased and will purchase more goods and services leading to an increase in the aggregate output demanded.
	need more money to purchase the same basket of goods which will lead to an increase in the demand for money leading to interest rate increases, and a reduction in the quantity of aggregate output demanded via a drop in investment demand.
	need less money to purchase the same basket of goods which will lead to a decrease in the demand for money leading to interest rate decreases, and an increase in the quantity of aggregate output demanded via an increase in investment demand.