ECON 2H03 Lecture Notes - Lecture 9: Fisher Hypothesis, Commodity Money, Money Supply

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2 Mar 2016

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Money is the stock of assets that can be readily used to make transactions. The dollars (or other currency) in the hands of the public make up the nation"s stock of money. It can also be defined as anything that is generally accepted as a medium of exchange. Medium of exchange: we use it to buy stuf. Unit of account: transfers purchasing power from the present to the future, usually can maintain 90% of value, the common unit by which everyone measures prices and values. Fiat money: has intrinsic value, examples: paper currency, currency, deposits in chequing accounts, and certificates of deposit are (as long as it"s after the time restriction, note that cheques are not money and neither are credit cards. Commodity money: has intrinsic value, examples: gold coins and cigarettes in prison. The money supply is the quantity of money available in the economy. There are three players: the central bank (bank of canada)

Related Questions

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

Suppose expected inflation was 2% and actual inflation was 4%. Then the ex post real interest rate was ---- than the ex ante real interest rate and there was a redistribution of wealth from ----.

a higher; borrowers to lenders

b higher; lenders to borrowers

c lower; borrowers to lenders

d lower; lenders to borrowers

Suppose that, in the short run, the price level is sticky (fixed) but nominal interest rates adjust to achieve equilibrium in the money market. According to the liquidity preference theory, if the central bank increases the money supply, then short-term nominal interest rates

a rise.

b fall.

c remain unchanged.

All else equal, if the ratio of reserves to deposits increases, the money supply

a increases

b decreases

c remains the same

Depreciation is tax-deductible but based on the historical cost of capital. If inflation is positive, then the corporate income tax ---- investment.

a encourages

b discourages

c has no effect on

If the price index for capital goods is the same as the price index for other goods, an index of the real cost of capital, in the absence of taxes, is the

a nominal interest rate plus the depreciation rate.

b real interest rate plus the depreciation rate.

c purchase price of a capital good multiplied by the sum of the nominal interest rate plus the depreciation rate.

d purchase price of a capital good multiplied by the sum of the real interest rate plus the depreciation rate.

1. Which of the following is NOT a tool the Fed uses to manage the money supply?

A) open market operations

B) discount policy

C) deposit insurance

D) reserve requirements 0.4 points

2. The problem with barter economies is:

A) less time and trouble to trade as compared with a money economy.

B) that there may be a double coincidence of wants.

C) a banking system for trade to occur.

D) that there be a single coincidence of wants.

3. If banks do not loan out all their excess reserves, then the real world multiplier is

A) smaller than 1/RR.

B) larger than 1/RR.

C) equal to 1/RR.

D) not related to 1/RR.

4. If the Federal Open Market Committee wants to increase the money supply through open market operations, it will

A) buy U.S. Treasury Securities.

B) sell U.S. Treasury Securities.

C) increase the discount rate.

D) decrease the discount rate.

5. M1 includes

A) currency in circulation, checking account balances at banks, the value of traveler's checks.

B) currency in circulation, savings accounts, checking account balances at banks.

C) currency in circulation, savings accounts, checking account balances at banks, travelers.

D) coins, savings account balances at banks, traveler's checks.

6. Using the quantity equation, if the velocity of money grows at 5 percent, the money supply grows at 10 percent, and real GDP grows at 4 percent, then the inflation rate will be

A) 19 percent.

B) 15 percent.

C) 11 percent.

D) 6 percent.

7. According to the quantity theory of money, the inflation rate equals

A) the money supply minus real output.

B) real output minus the money supply.

C) the growth rate of the money supply minus the growth rate of real output.

D) the growth rate of real output minus the growth rate of the money supply.

8. Suppose that you sold a basketball ticket for the SEC tournament for $750. Assuming that you deposit the entire $750 in your bank and that the RR = 10%, Answer the following questions while also using the same assumptions in the book/lecture slide. Correct answers contain no decimals. Please report them as they are.

a) What is the total change in checking account deposits?

b) How much new money is created? (or what is the change in money supply given the above state conditions?) The total change in the money supply is Blank 2.

c) The amount of new money created in this example would be higher or lower than in the real world. The amount of money created this way would be Bank 3 than in the real world.

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ECON 2H03 Lecture Notes - Lecture 9: Fisher Hypothesis, Commodity Money, Money Supply

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