Chapter 9

Question 1

Medium of exchange

Answer 1

acceptability by all as a means of payment solves the barter problem of the double coincidence of wants
- when buyers and sellers want the same thing

Question 2

unit of account

Answer 2

standard unit for measuring prices

Question 3

store of value

Answer 3

time machine for moving purchasing power from present to future so you can earn now and spend later

Question 4

demand for money is about the choice…

Answer 4

to hold you wealth as money or as a bond?

Question 5

bond

Answer 5

financial assets for which borrower promises to repay the original value at a specific future date and to make fixed regular interest payments
- bonds pay interest but do not have liquidity

• bonds do not promise a fixed percentage of interest
  when interest rates rise, the market price of a bond falls
  when interest rates fall, the market price of a bond rises

Question 6

money

Answer 6

provides liquidity: ease with which assets can be converted into the economy’s medium of exchange
- money is the most liquid asset
- money pays no interest but has liquidity

Question 7

yes markets self adjust believe

Answer 7

people hold more wealth as interest paying bonds since savings can be safely invested in loanable funds (bonds)
- money has no effect on the business cycles
- money helps loanable funds market quickly adjust economy back to equilibrium

Question 8

no markets fail often believe

Answer 8

people hold more wealth as money because fundamental uncertainty about future makes bond investments risky

• money creates new internal demand shocks
• money blocks domestic monetary transmission mechanism, slowing economy’s adjustment to equilibrium

Question 9

interest rate

Answer 9

price of holding money… what you give up by not holding bonds

• decrease in money demand = lower interest rates = positive demand shock = increasing AD, real GDP and decreasing unemployment and causing inflation
• increases in money demand = higher interest rates = negative demand shock = decreasing AD, real GDP and increasing unemployment, and causing deflation, also increases the cost of business investments

Question 10

law of demand for money

Answer 10

as the price of money/ interest rate rises, the quantity demand of money decreases

Question 11

demand curve shifts

Answer 11

• increases in real GDP increased demand for money and shifts the money demand curve rightward
• decreases in real GDP decreases demand for money and shifts the money demand curve leftward

Question 12

supply curve shifts

Answer 12

• increases in average prices increases demand for money and shifts the money demand curve rightward
• decreases in average prices decreases demand for money and shifts money supply curve left-ward

Question 13

commodity money

Answer 13

saleable product with alternative uses serving as money

Question 14

convertible paper money

Answer 14

paper money that can be converted into gold on demand

Question 15

fiat money

Answer 15

currency/ government issued bills and coins with no alternative uses; valuable simply by government decree

Question 16

deposit money

Answer 16

demand deposits where balances in bank accounts that depositors can withdraw on demand by using a debit card or writing a cheque

Question 17

M1+

Answer 17

currency in circulation plus demand deposits
- money in your chequing

Question 18

M2+

Answer 18

M1+ plus all other less liquid deposits
- money in your savings

Question 19

central bank

Answer 19

government institution responsbile for sueprvising chartered banks and other financial institutions and for regulating the supply of money

bank of canada is canada’s central bank

Question 20

fractional reserve banking

Answer 20

where banks hold only a fraction of deposits as reserves
- chartered banks can create money (demand deposits) because of fractional reserve banking

Question 21

bank run

Answer 21

many depositors withdraw cash all at once so bank many not have enough cash reserves to pay all depositors

• with fractional reserve banking, there is a risk of a bank run

Question 22

supply of money is determined by the bank of canada and chartered banks

Answer 22

• q of money supplied depends on the q of loans and demand deposits the banking system creates
• when interest rates rise, the q supplied increase. higher interest rates make loans more profitable so banks loan more and create more demand deposits

Question 23

perpetuity bonds

Answer 23

simplest example of inverse relation between bond prices and interest rates
- pays fixed dollar amount forever, but never repays the original investment

Question 24

price of bond/ present value

Answer 24

fixed amount of money per year/ interest rate

Question 25

at equilibrium interest rate

Answer 25

quantity of money demanded equal quantity of money supplied

Question 26

below equilibrium interest rate

Answer 26

excess demand for money - people sell bonds to get more money and increased supply of bonds cause falling bond prices and rising interest rates

Question 27

above equilibrium interest rate

Answer 27

excess supply for money - people buy bonds to get rid of money and increased demand for bonds causes rising bond prices and falling interest rates

Question 28

domestic monetary transmission mechanism

Answer 28

how money indirectly affects real GDP through interest rates, spending, and aggregate demand

Question 29

yes and no camps both agree that

Answer 29

money affects price levels and inflation