chap 15

Question 1

theory of liquidity preference

Answer 1

states the interest rate adjusts to bring money supply and demand into balance

Question 2

what happens to demand if IR inc

Answer 2

demand dec, less money held for transactions

demand will inc if dollar value of money inc

Question 3

equilibrium in the money market

Answer 3

r^1 (above equilibrium)
- EXCESS money supply
- wealth holders buy bonds, inc prices of bonds
- dec IR as bond prices inc, price price = PV of bond
- r^1 –> r* (equilibrium)

r^2
- excess DEMAND, not enough supply
- wealth holders sell bonds, dec price of bonds
- IR inc, r^2 –> r*

Question 4

wealth vs bonds

Answer 4

wealth earns NO interest

bonds earn interest

Question 5

increasing the money supply

Answer 5

if BoC inc money, shifts right

if money supply inc, there is excess money compared to bonds
- bond price inc and IR dec as ppl buy more bonds
- continues until new equilibrium

Question 6

flexible exchange rate

Answer 6

a policy where the value of the exchange rate can vary w/o interference from the central bank

• in small open economies, monetary injection causes dollar to depreciate
• inc demand for CAD g/s, not realized in closed economy

Question 7

fixed exchange rate

Answer 7

a policy where exchange rate is fixed by central bank

Question 8

closed economy AD changes in money supply

Answer 8

inc aggregate demand, inc demand for money supply
- shift right, IR inc
- bcs more transactions, IR falls

Question 9

open economy AD changes in money supply

Answer 9

same as closed economy

if IR higher in rw than r, foreign assets more attractive
- canada outflow, inc supply CAD to foreign economies
- CAD depreciates

Question 10

concs abt AD and money supply

Answer 10

boc can’t control money supply and value of CAD at same time