Chapter 7

Question 1

What are the functions of money:

Answer 1

1. As a medium of exchange, payment for goods and services.
2. As a unit of account, prices and wages are specified in the home currency.
3. As a store of value that does not yield interest, the interest rate is the opportunity cost of holding money
4. The central bank controls the quantity of money

Question 2

LM/ Money equation

Answer 2

MV(i) = PY

M/P = Y/V(i) RHS is the real demand for money

Question 3

Inflation is ( growth rates)

Answer 3

π= ΔP/P = ΔM/M + ΔV/V - ΔYn/Yn

Question 4

Monetary Base

Answer 4

Notes and coins in circulation + banks claims on the central bank

Question 5

Functions of money

Answer 5

1. All payments are made using the monetary base, used to carry out transactions
2. Prices and wages are units set in the monetary base
3. Cash dosent yield interest, banks get interest on their accounts in the central bank, although lower than actual interest
   4.Central bank can control the monetary base by various forms of open market operations and lending to banks

Question 6

M1

Answer 6

Notes and coins in circulation + demand deposits

Question 7

M2

Answer 7

Inc. savings deposits and time deposits below a certain value, may be costly to withdraw immediately

Question 8

M3

Answer 8

Also Includes large time deposits and some money market funds

Question 9

Seigniorage

Answer 9

ΔM/PY = (π+g+n)/V

Question 10

Problems of low inflation

Answer 10

Due to a lack of reduction in wages, low inflation can prevent the wage adjustment needed to maintain high employment.
Zero Lower Bound on interest rate - no one will lend at a 0 interest rate, better to just keep the money
Can mean no space to allow for shocks ( especially negative)