ECON 102 Lecture Notes - Lecture 15: Aggregate Demand, Liquidity Preference, Money Supply

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31 Mar 2016

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The inluence of monetary and fiscal policy on aggregate demand. The aggregate-demand curve slopes downward for three reasons: the wealth efect, the interest rate efect, the real exchange rate efect. The interest rate efect is the most important reason for the downward slope of the aggregate-demand curve. The theory of liquidity preference: keynes"s theory that the interest rate adjusts to bring money supply and money demand into balance. In the analysis that follows, the expected rate of inlaion is held constant. The bank of canada alters the money supply using two methods: Although many factors determine the quanity of money demanded, the one emphasized by the theory of liquidity preference is the interest rate. One important variable that shits the aggregate-demand curve is monetary policy. Muliplier efect: the addiional shits in aggregate demand that result when expansionary iscal policy increases income and thereby increases consumer spending.

Related Questions

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

The demand for money
A) d and e are correct
B) all of the following are correct
C) decreases as the average selling price of a unit of outputincreases
D) increases as GDP increases
E) is increased by credit card usage
2. The higher the interest rate, the more of their wealth peoplewill hold as money.
A) True
B) False
3. The money demand curve slopes
A) downward because the cost of holding money decreases as theinterest rate decreases
B) downward because the cost of holding money increases as theinterest rate decreases
C) upward because people demand more money as GDP increases
D) upward because people demand more money as GDP decreases
E) downward because people demand more money as the price levelincreases
4. Which of the following, other things constant, will shift themoney demand curve to the left?
A) an increase in the interest rate
B) a decrease in the interest rate
C) a decrease in real GDP
D) an increase in real GDP
E) an increase in the price level
5. An increase in the money supply will
A) increase the demand for money at each interest rate
B) decrease the demand for money at each interest rate
C) lead people to try to exchange money for interest-bearingassets
D) lead people to try to exchange interest-bearing assets formoney
E) increase the interest rate
6. When an increase in the money supply reduces the interest rate,investment and nominal GDP increase.
A) True
B) False
7. In the short run, a decrease in the money supply will cause adecrease in Gross Domestic Product and a decrease in the pricelevel.
A) True
B) False
8. The demand curve for investment is graphed with __________ onthe vertical axis and __________ on the horizontal axis.
A) the interest rate; investment
B) investment; the interest rate
C) the price level; investment
D) investment; the price level
E) real GDP; investment
9. As the interest rate increases,
A) the demand for investment curve shifts to the right
B) the demand for investment curve shifts to the left
C) there is a movement downward along the demand for investmentcurve
D) there is a movement upward along the demand for investmentcurve
E) GDP increases
10. If the economy experiences a contractionary gap and the Fedstimulates the economy, then:
A) The money supply is increasing because the Fed prints moremoney
B) The money supply is decreasing because the Fed hoardsmoney
C) The money supply is increasing because the Fed makes open-marketpurchases
D) The money supply is decreasing because the Fed makes open-marketsales
E) There is no change in the money supply because the Fed cannotinfluence the money supply
11. If the Fed decreases the money supply, GDP
A) increases because the resulting increase in the interest rateleads to a decrease in investment
B) increases because the resulting decrease in the interest rateleads to an increase in investment
C) decreases because the resulting increase in the interest rateleads to a decrease in investment
D) decreases because the resulting increase in the interest rateleads to an increase in investment
E) decreases because the resulting decrease in the interest rateleads to an increase in investment
12. An increase in the money supply can increase the price level,real GDP, or both, but it is impossible to tell exactly what willhappen without knowing the slope of the aggregate supplycurve.
A) True
B) False
13. If the economy experiences an expansionary gap and the Fedsells US government securities in the open-market, then:
A) Money supply increases, investment increases, aggregate demandincreases
B) Money supply increases, the interest rate increases, and theaggregate demand increases
C) Money supply decreases, the interest rate decreases, and theaggregate demand falls
D) Money supply decreases, the investment decreases, and theaggregate demand decreases
E) Interest rate falls, investment falls, aggregate demandincreases
14. If the money supply equals $1,000 and nominal GDP equals$3,000, then V
A) equals 1/3
B) equals 3
C) equals 3 million
D) cannot be determined since we do not know anything aboutprices
E) cannot be determined since we do not know anything about realGDP
15. If the money supply is increasing at a constant 8 percent,velocity is constant, real GDP is increasing at 5 percent, and theinflation rate is 3 percent, which of the following is true?
A) The growth rate of GDP is too low to be maintained.
B) The inflation rate is too low to be maintained.
C) Velocity is too low to be maintained.
D) The money supply growth rate is too low to be maintained.
E) This situation can continue indefinitely.
16. If real output and velocity are stable and predictable, thenthe equation of exchange can be used to derive a simplerelationship between
A) the money supply and the price level
B) the money supply and the interest rate
C) the money supply and the foreign exchange rate
D) velocity and real GDP
E) velocity and nominal GDP
17. For the quantity theory of money to yield usefulpredictions,
A) fiscal policy must be ineffective in altering aggregatedemand
B) fiscal policy must be effective in altering aggregatedemand
C) the economy must be operating at the potential level of realGross Domestic Product
D) velocity must be stable or predictable
E) velocity must be unstable
18. A rising rate of inflation
A) makes people more willing to hold money as an asset
B) reduces the usefulness of money as a store of value and thusincreases the velocity of money
C) increases the usefulness of money as a medium of exchange andthus reduces the velocity of money
D) is usually preceded by a reduction in the money supply
E) does not, apparently, have any effect on the velocity ofmoney
19. There is considerable disagreement about whether the Fedshould
A) engage in open market operations
B) have the power to set reserve requirements
C) reduce the money supply when the economy is growing
D) allow banks to invest in the stock market
E) attempt to control interest rates or should instead attempt tocontrol the money supply
20. For interest rates to remain stable during economic expansions,the growth rate of the money supply should
A) exceed the growth in the demand for money
B) just match the growth in the demand for money
C) be less than the growth in the demand for money
D) be zero
E) just match the growth in nominal GDP

salmonpug424

Ryan savedâ $50,000 last year in his bank account so that he could buy a car this year. In thisâ case, money served the function of aâ ________.

means of deferred payment

unit of account

store of value

medium of exchange

A bank is said to have enough liquidityâ if:

it holds deposits amounting to at leastâ $100,000.

it operates for seven days a week for more than 12 hours a day.

it has enough funds to conduct its

dayminusâtominusâday

businesses and meet the regulatory requirements.

the value of its assets exceeds the value of its liabilities by at leastâ $50,000.

Consider an economy that only produces wooden chairs. Inâ 2012, the economy produced 100 wooden chairs priced atâ $10 each. The nominal GDP of the economy for the year 2012 willâ be:

â$10,000.

â$10.

â$100.

â$1,000.

Hyperinflationary episodes are always related to extremely rapid growthâ of:

real GDP.

money supply.

interest rates.

money demand.

Which of the following financial organizations have the ability to influence the supply of reserves in the Unitedâ States?

The World Bank

The Fed

Only private commercial banks

Only public sector banks

A retired worker receives a pension that is not indexed to inflation. Which of the following will happen if the rate of inflationâ rises?

The retiree will be better off.

Theâ retiree's purchasing power will fall.

The shareholders of the firm in which he worked will lose.

Theâ retiree's purchasing power will increase.

Assuming all elseâ equal, what is likely to happen to the demand curve for reserves in an economy if it goes through a period of rapidâ expansion?

There will be a n upward movement along the demand curve for reserves.

The demand curve for reserves will shift to the left.

There will be a downward movement along the demand curve for reserves.

The demand curve for reserves will shift to the right.

If the nominal interest rate in an economy isâ 9% and the expected inflation rate isâ 6%, then the expected real interest rate in the economyâ is:

â15%.

â9%.

â6%.

â3%.

If nominal GDPâ increases, what might be the cause of thisâ increase?

If nominal GDPâ increases, this could be causedâ by:

â(Select

all that

apply.â)

An increase in the price level

Deflation

An increase in real GDP

A decrease in the price level

Given the followingâ information, what is the growth rate of nominalâ GDP?

Upper Y 0Y0

real GDPâ =

â$10001000

â(in millions)

Upper Y 1Y1

real GDPâ =

â$11001100

â(in millions)

Upper Y 0Y0

price levelâ = 120120

Upper Y 1Y1

price levelâ = 130130The growth rate of nominal GDP is

nothing â%.

â (Round

your answer to the nearest

hundredth.â)

According to the quantity theory ofâ money, what must the growth rate of the money supply be given the followingâ information?

The growth rate of real GDP is

1.01.0â%.

The growth rate of nominal GDP is

3.83.8â%.

The nominal interest rate is

7.17.1â%.

The real interest rate is

4.34.3â%.

The money supplyâ (M2) is

â$10 comma 61210,612

â(in billions)According to the quantity theory ofâ money, the growth rate of the money supply must be

nothing â%.

â (Round

your answer to the nearest

tenth.â)

According to the quantity theory ofâ money, what is the inflationâ rate?

Use the information given above and calculate the inflation rate.

According to the quantity theory ofâ money, the inflation rate is

nothing â%.

â (Round

your answer to the nearest

tenth.â)

According to the quantity theory ofâ money, the inflation rate is

the ratio of money supply to nominal GDP.

the gap between the growth rate of money supply and the growth rate of real GDP.

the gap between the nominal and real interest rates.

the gap between the growth rate of money supply and the growth rate of nominal GDP.

If the inflation rate is

positivepositiveâ,

what must beâ true?

The growth rate of nominal GDP

greater than>

the growth rate of money supply.

The growth rate of real GDP

less than<

the growth rate of money supply.

The growth rate of real GDP

greater than>

the growth rate of money supply.

The growth rate of nominal GDP

less than<

the growth rate of money supply.

An open market operation isâ ____________.

the process of sellingâ Fed-issued IOUs between banks.

an exchange between a private bank and the Federal Reserve where the Fed buys or sells government bonds to private banks.

where a bank borrows reserves or bonds from the Federalâ Reserve's discount window.

an exchange between private banks where the banks buy or sell bonds to each other.

The Federal Reserve conducts open market operations when it wants toâ ____________.

change the liquidity levels of banks.

influence the discount rate.

influence the federal funds rate.

change the level of reserves it holds for banks.

When the Fed

sellssells

government bonds

toto

privateâ banks, it

â¼

the electronic reserves that banks hold.

lavendersquirrel414

ECON 102 Lecture Notes - Lecture 15: Aggregate Demand, Liquidity Preference, Money Supply

ECON 102 Full Course Notes

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