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ECON 3580 Lecture Notes - Lecture 5: Money Supply, Shortage, Opportunity Cost

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School
York University
Department
Economics
Course
ECON 3580
Professor
Sharif Khan

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Document Summary

A model of the money market: when there is an excess demand of monetary assets, there is an excess supply of interest- bearing assets like bonds, loans, and deposits. People who desire monetary assets but do not have access to them are willing to sell nonmonetary assets in return for the monetary assets that they desire. Long run and short run: in the short run, prices do not have sufficient time to adjust to market conditions. The analysis heretofore has been a short-run analysis: in the long run, prices of factors of production and of output have sufficient time to adjust to market conditions. Wages adjust to the demand and supply of labor. Real output and income are determined by the amount of workers and other factors of production by the economy"s productive capacity not by the quantity of money supplied.

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Related Questions

A) Which of the following is the most description of events when monetary authorities increase the size of commercial banks' excess reserves?

1.A rise in interest rates increase the money, causing a decrease in investment spending, output, and employment

2. A fall in interest rates decrease the money supply, causing an increase in investment spending, output, and employment

3. The money supply is increased, which decreases the interest rate, and causes investment spending, output, and employment to increase

4. The money supply is decreased, which increases the interest rate, and causes investment spending, output and employment to decrease

 

B) A tariff is a:

1. tax

2.Price ceiling

3. Quantity limit

4. Subsidy

Multiple Choice

1. Assume that the money multiplier equals 2.5 and if the Fed purchases $10 million in bonds from a bank, the monetary supply will:

  1. Increase by $10 million.
  2. Increase by $25 million.
  3. Decrease by $10 million.
  4. Decrease by $25 million.

2. The monetary base is defined as:

  1. all currency in circulation.
  2. checkable deposits at depository institutions.
  3. excess reserves in the banking system.
  4. currency plus total banking reserves.

3. Which of the following means of financing federal government spending will increase the monetary base?

  1. raising the corporate income tax.
  2. raising the personal income tax.
  3. selling bonds to the public.
  4. selling bonds to the Fed.

Short Answer

1. Assume the Federal Reserve Board is undertaking an expansionarymonetary policy. Explain the details of how the expansionary Fed impacts each of the following:

  1. Open market operations - how does the Fed use open market operations for an expansionary monetary policy?
  2. The monetary base.
  3. Money Supply.
  4. Fed funds interest rate.
  5. Long-term interest rates.
  6. Business Investment.
  7. Aggregate demand.
  8. Economic growth.
  9. Unemployment rate.

2. Under certain circumstances, expansionary Fed policy may not have much of an effect on the rate of economic growth. Give a reason why, and explain?

3. Regarding the Asian currency crisis, answer the following questions:

  1. Describe the normal reasons why a currency undergoes a significant depreciation and what were the important characteristics of the Asian countries involved in the crisis?
  2. What are some expected domestic economic consequences of the currency crisis for the countries involved? Focus on:
    • import prices of goods and services into the Asian country.
    • export prices of goods and services from the Asian country.
    • Domestic inflation rates.
  3. Assume that the countries involved undertake a tight monetary policy and raise interest rates in response to the crisis. What are the two primary reasons for raising interest rates in their case?
  4. Given high domestic interest rates, what is the economic outlook for these Asian countries in the next few years?

1. What happens when the price level rises?
a. The value of money rises, and exchange rates and interest rates also rise.
b. The value of money rises, while exchange rates and interest rates fall.
c. The value of money falls while exchange rates and interest rates rise.
d. The value of money falls, and exchange rates and interest rates also fall.


2. Which of the following best describes what happens when the price level rises?
a. Households increase foreign bond purchases, and the supply of dollars increases.
b. Households increase foreign bond purchases, and the supply of dollars decreases.
c. Households decrease foreign bond purchases, and the supply of dollars increases.
d. Households decrease foreign bond purchases, and the supply of dollars decreases.


3. In which of the following situations does investment spending increase?
a. when the price level rises, causing interest rates to rise
b. when the price level rises, causing interest rates to fall
c. when the price level falls, causing interest rates to rise
d. when the price level falls, causing interest rates to fall

4. If a government started with a deficit and moved to a surplus, which of the following best describes the
effects of these changes?
a. Domestic investment and the real exchange rate would rise.
b. Domestic investment and the real exchange rate would fall.
c. Domestic investment would rise, and the real exchange rate would fall.
d. Domestic investment would fall, and the real exchange rate would rise.

5. Suppose the economy is in long-run equilibrium. In a short span of time, there is a sharp increase in the
minimum wage. In the short run, what would we expect to happen?
a. the price level to rise, and real GDP to fall
b. the price level to fall, and real GDP to remain unchanged
c. the price level to remain unchanged, and real GDP to fall
d. the price level to fall, and the real GDP to rise the same