ECON231 Chapter Notes - Chapter 15: Foreign Exchange Market, Money Supply, Shortage

8 views2 pages

lemonbeetle804

27 Dec 2019

School

University of Waterloo

Department

Economics

Course

ECON231

Professor

Barbara Bloemhoff

For unlimited access to Textbook Notes, a Class+ subscription is required.

Document Summary

Characteristics of money: medium of exchange, unit of account, store of value. Money supply: the monetary aggregate the federal reserve calls m1; the total amount of currency and checking deposits held by households and firms. Demand for an asset: is based on three categories: expected return relative to other assets, riskiness of the expected return, liquidity. Interest rates and money: interest rates are the opportunity cost (price) of holding money. A rise in interest rates causes demand for money to fall. Transaction value and money: a rise in the average value of transactions carried out by a firm causes its demand for money to rise. Aggregate money demand: the total demand for money by all households and firms in the economy. Interest rates and demand/supply of money: an excess supply of money causes interest rates to fall, and an excess demand cause interest rates to rise.

Related Questions

A) When the real economy expands (Y rises), the demand for money expands. As a result households hold more cash and the supply of money expands.

B) Inflation, a rise in the price level, causes the demand for money to decline. Because inflation causes money to be worthless, households want to hold less of it.

C) If the fed buys bonds in the open market interest rates will no doubt rise.

1. State whether you agree or disagree with the following statements and explain why?

a. When the real economy expands (Y rises), the demand for money expands. As a result, households hold more cash and the supply of money expands.

b. Inflation, a rise in the price level, causes the demand for money to decline. Because inflation causes money to be worthless, households desire to hold less of it.

c. If the Fed buys bonds in the open market and at the same time we experience a recession, interest rates will no doubt rise.

mauvemarten239

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

ECON231 Chapter Notes - Chapter 15: Foreign Exchange Market, Money Supply, Shortage

Document Summary

Get access

Related Documents

ECON231 Chapter Notes - Chapter 16: Fisher Hypothesis, Money Supply, Money Market

ECON231 Lecture Notes - Lecture 3: Utah Transit Authority, Arbitrage, Interest Rate

ECON231 Lecture Notes - Lecture 5: Eurodollar, Federal Reserve System, Aggregate Demand

Related Questions