Session 4 - Money, Interest Rates, and Exchange Rates

Question 1

What Influences Demand of Money for Individuals and Institutions?

Accepted Answer

Liquidity, Interest rates / expected rate of return on monetary assets

Question 2

In the short run prices of factors of production and of output:

Accepted Answer

do not have sufficient time to adjust to market conditions

Question 3

What is true about Money?

Accepted Answer

Can be used without substantial transaction costs, Money is a liquid asset, Can be easily used to pay for goods and services or repay debt

Question 4

Overshooting helps explain why exchange rates are so:

Accepted Answer

volatile

Question 5

Effect of the decrease in the domestic Money Supply

Accepted Answer

the local currency apreciates, the domestic interest rate increases

Question 6

When there is an excess demand of monetary assets, there is

Accepted Answer

excess supply of interest-bearing assets (ex. bonds, loans, and deposits)

Question 7

Given the real money supply, a rise in real income

Accepted Answer

RAISES the interest rate

Question 8

The exchange rate is said to overshoot when:

Accepted Answer

its immediate response to a change is GREATER than its long-run response

Question 9

How does an INCREASE in the money supply cause prices of OUTPUT and INPUTS to change?

Accepted Answer

WAGES rise to attract more workers or compensate workers for overtime, Prices of output will eventually rise to compensate for higher costs, STRONG DEMAND OF LABOUR to meet high demand for goods & services, People have more funds available to pay for goods and services

Question 10

Money demand:

Accepted Answer

amount of monet assets we are willing to hold (instead of illiquid assets)

Question 11

Non-monetary assets:

Accepted Answer

Are less liquid that monetary assets, normally earn a higher interest rate or rate of return than monetary assets, require substantial transaction costs

Question 12

What is true about equilibrium in the foreign exchange market?

Accepted Answer

Arbitrage in foreign exchange market is not possible (RE interest parity), Deposits of all currencies offer the same expected rate of return, It implies that deposits in all currencies are equally desirable assets

Question 13

When the money market is in equilibrium

Accepted Answer

equilibrium interest rate is established, aggregate real money demand and supply are equal

Question 14

Equilibrium in the foreign exchange market when deposits of all currencies offer the same expected rate of return:

Accepted Answer

Interest parity

Question 15

What Influences Aggregate Demand of Money?

Accepted Answer

Prices of goods and services bought in transactions, Interest rates/expected rates of return, Income

Question 16

What is true about simultaneous equilibrium in the domestic Money Market and the Foreign Exchange Market

Accepted Answer

Both asset markets are in equilibrium at one (the same) interest rate, Money supply = money demand at equibrium with interest R and exchange E, The interest parity condition holds

Question 17

Effect of an Increase in the FOREIGN Money Supply (abroad) on the Exchange Rate

Accepted Answer

Foreign currency depreciates against our domestic currency, Our domestic currency appreciates against foreign currency

Question 18

Model of money market achieves equilibrium when:

Accepted Answer

Q of real monetary assets supplied = Q of real monetary assets demanded, no excess demand or excess supply of monetary assets exist, no shortages or surpluses of monetary assets exist

Question 19

For a given price level, P, and real income level, Y, an increase in the money supply

Accepted Answer

REDUCES the interest rate

Question 20

Real money demand schedule shows that for a given real income level Y real money demand:

Accepted Answer

rises as the interest rate falls

Question 21

The money market is where monetary or liquid assets, which are loosely called “money”

Accepted Answer

are lent and borrowed

Question 22

In the long run, the quantity of money supplied is predicted

Accepted Answer

NOT to influence aggregate demand of real monetary assets, NOT to influence the output & (real) interest rates

Question 23

In the long run:

Accepted Answer

Wages adjust to the demand and supply of labor, Real output and income are determined by the economy’s productive capacity, (Real) interest rates depend on the supply & demand of SAVED funds

Question 24

Monetary policy actions by domestic central bank :

Accepted Answer

change exchange rate that clears the foreign exchange market, afect the domestic interest rate

Question 25

In the long run quantity of money supplied is predicted to make the level of:

Accepted Answer

average PRICES adjust proportionally

Question 26

When monetary policy has IMMEDIATE effect on interest rate but not on prices &(expected) inflation, what do we predict?

Accepted Answer

Overshooting is predicted to occur

Question 27

When there is an excess supply of monetary assets, there is

Accepted Answer

excess demand for interest-bearing assets (ex. bonds, loans, and deposits)

Question 28

In the narrow definition 'Money' contain:

Accepted Answer

Debit card accounts, Currency in circulation, Checking deposits

Question 29

A permanent increase in a country’s money supply causes a long-run:

Accepted Answer

inflation, depreciation of its currency

Question 30

If workers and producers expect inflation:

Accepted Answer

producers are more willing to raise wages, workers will want to be compensated, producers will be able to match higher costs if they expect to raise prices

Question 31

Effect of the increase in the domestic Money Supply

Accepted Answer

the local currency depreciates, the domestic interest rate declines

Question 32

What is true for long run?

Accepted Answer

Inflation is understood to be a purely MONETARY FENOMENON, direct relationship btw INFLATION rate and changes in the money SUPPLY, INFLATION rate = growth rate in mon supply minus growth rate in mon demand

Question 33

An increase in real income

Accepted Answer

and causes the whole demand schedule to shift upward, raises demand for real money balances at every level of the interest rate

Session 4 - Money, Interest Rates, and Exchange Rates

Questions 33

Session 4 - Money, Interest Rates, and Exchange Rates

Questions 33