3 (1) Flashcards
fcts of money?
- medium of exchange
- unit of account
- store value
most narrow definition of money and its composants?
M1:
- currency in circulation
- checking deposits
- debit card accounts
what are the factors affecting individuals money demand?
- expected rates of return on non-monetary assets
- inflation risk
- liquidity
why is the inflation not very important in explaining individuals money demand?
unexpected inflation reduces the purchasing power of money, but many non-monetary assets are subject to inflation risk = inflation risk not very important in defining the demand of monetary assets
what are the factors affecting aggregate money demand?
- expected rates of return on non-monetary assets
- prices of good and servies
- aggregate real income (GNP, Y)
what is the aggregate Md equation?
Md = P * L(Y,R)
what is the aggregate real Md equation?
Md/P = L(Y,R)
real Md expresses aggregate demand in terms of…
goods and services
why does the aggregate real Md L(R,Y) sloped downward?
for a given P and Y, it slopes downward because a decrease of R increases real Md of each HH and firm
a change in R causes a shift of a change along the agg. real Md curve?
changes in R causes a mvmt along the curve L(R,Y)
a change in Y causes a shift of a change along the agg. real Md curve?
Changes in Y causes a shift of the curve L(R,Y)
in the money market, is there is an initial excess supply of money, what happens to R
R decreases because there is higher demand for asset = price increase = R decreases
in the money market, is there is an initial excess demand of money, what happens to R
R increases because there is lower demand for asset = price decrease = R increases
what reasons explain why prices are rigid in the short-run?
- wages (input costs)
- menu costs
- customer relationships
in the short run, what are the effects of an increase in the US money supply?
increase of US Ms = decrease of R = lower expected returns on US deposits = $ depreciates to restore UIP
in the short run, what are the effects of an increase in the euro money supply on R & E?
increase of euro Ms = decrease of Reuro = decrease of expected return on euro deposits = euro depreciates = $ appreciates to restore UIP
given the price level and output, what are the short run effects of an increase of Ms on R and the currency?
increase of Ms = decrease of R = currency depreciation
given the price level and output, what are the short run effects of a decrease of Ms on R and the currency?
decrease of Ms = increase of R = currency appreciation
in the short run, what are the effects of a rise in real income on R&E?
A rise in real income (Y) = more production = more transactions = increase of Md (right shift of the curve) = excess demand of money = R increases = $ appreciation
in the short run, what are the effects of a fall in output on R&E?
fall in output = Y decreases = Md decreases (left shift of the curve) = R decreases = $ depreciates
for a given price level and Ms, what are the short run effects of an increase of Y on R and currency?
increase of Y = increase of R = currency appreciates
for a given price level and Ms, what are the short-run effects of a decrease of Y on R and currency?
decrease of Y = decrease of R = currency depreciates
what are the implications of money neutrality in the long run?
- real variables are not affected by money supply (real output Y, real R, real Md)
what happens when there is a permanent change in money supply?
since real money demand L(R,Y) is not affected by a change in Ms, it follows that prices adjust one-for-one proportionally (Ms=P*L(R,Y))
