ECO 211 WCC FINAL EXAM STUDY
GUIDE LATEST UPDATED
Why do we assume that the money supply curve is vertical? - ANSWER-Because
interest rates don't affect it
How do changes in the money supply affect the money supply curve? - ANSWER-Move
it right or left--- Money supply curve is vertical (interest rates do not affect it)
Explain the difference between the transactions and asset demand for money. Link
them to the appropriate measure of the money supply - ANSWER-The transaction
demand for money stems from its function as a medium of exchange
We need to have money to make our day-to-day purchases.
• That demand doesn't really depend on the interest rate.
Therefore the transactions demand is vertical.
• Anytime the value of the goods and services produced changes our demand for
money changes.
Changes in NGDP shift the transactions demand curve.
The asset demand for money stems from its function as a store of value.
Money is an asset like stocks and bonds.
Strength: It rarely drops in value precipitously.
Weakness: It doesn't earn any interest.
• The asset demand does depend on the interest rate. The interest rate is the
opportunity cost of holding your wealth as
money. The asset demand curve has a negative slope.
What is transactions demand and what factors shift it - ANSWER-* $$ as a medium of
exchange
*value of goods and services can shift it (AKA Nominal GDP)
*not really volatile
What is the asset demand curve and how do interest rates affect the transactions
demand for money - ANSWER-*Money serving as a store of value
* interest rate can shift it
*volatile
how do contractionary and expansionary policies affect the money market - ANSWER-
Contractionary--> decreases supply in money market (higher interest rates)
Expansionary----> Increases supply in money market (lower interest rates)
, What are the limitations on the Fed's ability to set both interest rates and the money
supply? - ANSWER-The Fed can increase the monetary base, but it can't force banks to
lend.
* It can't perfectly predict the change in interest rates unless it knows the exact slope of
the money demand curve.
* It can't simultaneously select the money supply and interest rate.
Define the following terms for a bond: maturity, face value, and price. - ANSWER-•
Maturity - the length of time you need to wait to redeem the bond
• Face value - the amount of money for which the bond can be redeemed at maturity
• Price - what someone is willing to pay for the bond now
What is the relationship between bond prices and interest rates? - ANSWER-Bond
prices and interest rates are inversely related
how do changes in the economy affect the foreign exchange market? - ANSWER-When
there is a recession, the interest rates will fall. It will cause the depreciation of the
foreign capital. When there are fewer interest rates and less foreign capital, the value of
the currency will start to decrease. As the result, there will be a lower exchange rate.
when there is an increase in the interest rate (expansion), the lenders will expect higher
rates. The result is obvious. It will attract more foreign capital. With more foreign capital,
there will be a rise in the exchange rates.
How do changes in monetary policy affect interest rates and the exchange rate? -
ANSWER-Expansionary monetary policy----> lower interest rates, lower exchange rate
Recessionary monetary policy----> higher interest rates, higher exchange rate
Describe in general terms the monetary policy guidance in the Federal Reserve Act and
subsequent employment acts. - ANSWER-• Federal Reserve Act of 1913• Gives no real
guidance as to what the Fed should do to enhance macroeconomic
performance
• Employment Act of 1948• States that the federal government should "promote
maximum employment, production, and purchasing power. • Somewhat vague and the
goals may not be mutually compatible
• Full Employment Act of 1978 (Humphrey Hawkins Act)
• Specifies a 3-4% unemployment rate and 3% inflation or less
Clearly explain what we mean by "scarcity", and what it implies for us as individuals and
as a society. - ANSWER-Scarcity forces us to allocate our resources to satisfy our most
important wants and needs.
GUIDE LATEST UPDATED
Why do we assume that the money supply curve is vertical? - ANSWER-Because
interest rates don't affect it
How do changes in the money supply affect the money supply curve? - ANSWER-Move
it right or left--- Money supply curve is vertical (interest rates do not affect it)
Explain the difference between the transactions and asset demand for money. Link
them to the appropriate measure of the money supply - ANSWER-The transaction
demand for money stems from its function as a medium of exchange
We need to have money to make our day-to-day purchases.
• That demand doesn't really depend on the interest rate.
Therefore the transactions demand is vertical.
• Anytime the value of the goods and services produced changes our demand for
money changes.
Changes in NGDP shift the transactions demand curve.
The asset demand for money stems from its function as a store of value.
Money is an asset like stocks and bonds.
Strength: It rarely drops in value precipitously.
Weakness: It doesn't earn any interest.
• The asset demand does depend on the interest rate. The interest rate is the
opportunity cost of holding your wealth as
money. The asset demand curve has a negative slope.
What is transactions demand and what factors shift it - ANSWER-* $$ as a medium of
exchange
*value of goods and services can shift it (AKA Nominal GDP)
*not really volatile
What is the asset demand curve and how do interest rates affect the transactions
demand for money - ANSWER-*Money serving as a store of value
* interest rate can shift it
*volatile
how do contractionary and expansionary policies affect the money market - ANSWER-
Contractionary--> decreases supply in money market (higher interest rates)
Expansionary----> Increases supply in money market (lower interest rates)
, What are the limitations on the Fed's ability to set both interest rates and the money
supply? - ANSWER-The Fed can increase the monetary base, but it can't force banks to
lend.
* It can't perfectly predict the change in interest rates unless it knows the exact slope of
the money demand curve.
* It can't simultaneously select the money supply and interest rate.
Define the following terms for a bond: maturity, face value, and price. - ANSWER-•
Maturity - the length of time you need to wait to redeem the bond
• Face value - the amount of money for which the bond can be redeemed at maturity
• Price - what someone is willing to pay for the bond now
What is the relationship between bond prices and interest rates? - ANSWER-Bond
prices and interest rates are inversely related
how do changes in the economy affect the foreign exchange market? - ANSWER-When
there is a recession, the interest rates will fall. It will cause the depreciation of the
foreign capital. When there are fewer interest rates and less foreign capital, the value of
the currency will start to decrease. As the result, there will be a lower exchange rate.
when there is an increase in the interest rate (expansion), the lenders will expect higher
rates. The result is obvious. It will attract more foreign capital. With more foreign capital,
there will be a rise in the exchange rates.
How do changes in monetary policy affect interest rates and the exchange rate? -
ANSWER-Expansionary monetary policy----> lower interest rates, lower exchange rate
Recessionary monetary policy----> higher interest rates, higher exchange rate
Describe in general terms the monetary policy guidance in the Federal Reserve Act and
subsequent employment acts. - ANSWER-• Federal Reserve Act of 1913• Gives no real
guidance as to what the Fed should do to enhance macroeconomic
performance
• Employment Act of 1948• States that the federal government should "promote
maximum employment, production, and purchasing power. • Somewhat vague and the
goals may not be mutually compatible
• Full Employment Act of 1978 (Humphrey Hawkins Act)
• Specifies a 3-4% unemployment rate and 3% inflation or less
Clearly explain what we mean by "scarcity", and what it implies for us as individuals and
as a society. - ANSWER-Scarcity forces us to allocate our resources to satisfy our most
important wants and needs.
