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- 1. Which do you think would be more harmful to the economy—an inflation rate that averages 5 percent a year that has a high standard deviation or an inflation rate of 7 percent that has a standard deviation close to zero? 2. Suppose a major bank needs to borrow $20 billion overnight that it cannot obtain from private creditors. The Fed is willing to make a discount loan of $20 billion provided that it will not alter the aggregate supply of reserves to the banking system. How can it do so?19 The following is TRUE about monetary policy EXCEPT, It relates to revenue and expenditure by government budget. It manages the creation and flow of money and credit in the economy. It aims to control the money supply and regulate the monetary sector. It uses interest rate and money supply as monetary tools.20. Assuming that prices of various consumer goods increase in the country. This event will _____________ and cause the interest rates in the money market to ___________. A. increase the supply of money; fall B.decrease the supply of money; rise C. increase the demand for money; fall D. increase the demand for money; rise
- 1. Discuss the Quantity Theory of Money. What are its assumptions and limitations?2. Critical analysis Q8 Indicate how each action in the following table would affect the money supply. Action Increase Money Supply Decrease Money Supply A purchase by the Fed of $100 million in U.S. securities from a commercial bank A sale by the Fed of $200 million in U.S. securities to a private investor2. What is the relationship between money demand and interest rates? What happens when the interest rate reaches the zero lower bound?
- 32 - What happens as a result of aggregate demand and aggregate supply if the money supply decreases?A) Prices fall – output increasesB) NoneC) Prices increase – output decreasesD) Prices fall – production decreasesE) Prices increase – production increases(Figure: A Money Market) The accompanying figure Equilibrium in the Money Market shows the money market in equilibrium at an interest rate of r2. Holding the money supply constant, which of the following might cause the interest rate in the market to decrease to r1? A) The inflation rate falls to historically low levels. B) Higher payroll taxes cause employers to pay workers cash under the table. C) There is a significant increase in the stock market. D) A recession decreases real GDP.1. Explain with aid of a diagram what happens to the money supply, money demand, the value of money, and the price level if the Central Bank increases the money supply.
- 2. What “backs" the money supply in the United States? What determines the value (domestic purchasing power) of money? How does the purchasing power of money relate to the price level? Who in the United States is responsible for maintaining money's purchasing power? There is ( no, some ) concrete backing to the money supply in the United States. Paper money, which has ( some, no ) intrinsic value, has value only because people are willing to accept it in exchange for goods and services, including their labor services as employees. And people are willing to accept paper as money because they know that everyone else is also willing to do so. If the monetary authorities were issuing new banknotes at a rate far in excess of available output, the acceptability of paper money would (increase, diminish ). People would start to worry about whether the banknotes would be worth much after they received them. Checks are part of the money supply and ( are, are not) legal tender, but people accept…Question 3a) What are the functions of money?b) Draw diagrams illustrating the impact on the demand for money, the supply of money and the equilibrium interest rate, of each of the following. Explain what is going on in the money market in each case.(i) The central bank sells securities on the open market(ii) The economy grows (GDP increases) but the central bank moves tokeep interest rates constant.6. Demand for money and how demand for money curve look like, it’s relationship with GDP and interest rate. M1and M2, what does M1 supply of money consist of, M1 is also called narrowly defined money and it consists primarily of checkable deposits. How interest rates in the market are determined, Velocity of money, factors that determine velocity of money, V1 and V2. Quantity theory of money -
