Chapter 12

Question 1

3 reasons for holding money

Answer 1

• transactions
• precautionary
• speculative

Question 2

3 variables we focus on, how they affect money supply

Answer 2

real gdp +
price level +
interest rate -

Question 3

3 stages of monetary transmission

Answer 3

1. change in money supply or demand determine new equilibrium
2. new equilibrium interest rate translates into a change in desired investment expenditure
3. The change in desired investment expenditure causes a change in AD

Question 4

Re explain monetary transmission with open economy

Answer 4

• after new interest rate: capital inflow or outflow, affects exchange rate, inflow appreciates and outflow depreciates, depreciation means higher exports which adds to AE further, and appreciation yields the opposite

Question 5

previous reasons for negative slope of AD, and one new reason

Answer 5

1. change in price affects private wealth
2. affects NX
   new one:
3. rise in P increases money demand and the interest rate, REDUCING DESIRED INVESTMENT

Question 6

What is money neutrality

Answer 6

Changes in the money supply do not have real effects on the economy, especially in the long run

Question 7

is money neutrality debatable?

Answer 7

yes,
It can affect the growth rate:
- change in MS, by affecting interest rate, can affect investment and techno change
- in a long period of unemployment, workers can lose human capital and this affects Y* and its growth rate