Use LEFT and RIGHT arrow keys to navigate between flashcards;
Use UP and DOWN arrow keys to flip the card;
H to show hint;
A reads text to speech;
3 Cards in this Set
- Front
- Back
|
Consider the following changes and state whther the effect on the real quantity of money demanded is an increaes, decrease, or no change. a. an increase in the nominal interest rate, i. b. an increase in real transaction costs c. an increase in real GDP, Y, caused by a rise in per capita real GDP with population held constant d. an increase in real GDP, Y, caused by a rise in population with per capita real GDP held constant. e. an increase in the price level, P |
a. For any given price level an increase in the nominal interest rate i, will lower the real demand for money b. If transaction costs are high the M will be below and asset income will be high. The household's choice of average money holdings entails finding the right balance between additional asset inome and added transactin cost c. An increase in real GDP caused by increase per capita income will increase the demand for money. d. An increase in real GDP caused by population growth will inrease the demand for money e. An increase in the price levels will increase the demand for money. |
|
|
Suppose that the nominal quantity of money, M, doubles once and for all. a. The rise in the price level, P, suggests that workers will be worse off. Is this correct? b. The rise in the nominal wage rate, w, suggests that workers will be better off. Is this right? c. How do your results relate to the conept of the neutrality of money? |
a. A one time doubling will reduce the real wage only nominal wages are constant. If nominal wages also doubled, then the real wage will not change. b. As in part 3a, an increase in the nominal wage will only help the worker if prices do not increase as well. c. Money neutrality holds if nominal values change in proportion. so that real values are unaffected Obviously if both nominal wages and prices double, then the real labor employed, real output, and real labor income will not change |
|
|
For empirical evidnce on these effects, see the study by Lawrence Kenny (1991). a. Show on a graph the pattern of the households money holding over a year. What is the average money balance? Should we identify this average balance with the quantity of money demanded in our model? b. Suppose now that the frequency of withdrawals from the savings account rises to two per month. What happens to the average money balance? c. Return to question a, but assume now that consumption expenditure is 120,000 per year. If withdrawals from the savings account are still made monthly, what is the average money balance? How does this average compare to the one in question a? Is it optimal for the frequency of withdrawals to remain the same when consumption expenditure increases? Explain. |
a. The large triangels show the cash balance is 12,000 at the first of each month and gradually falls to zero by the end of the month. (The graph shows the first three months). Average money balance is 6000, which corresponds to the quantity of money demanded in our model. b. See the smaller triangles in the graph. Average money holdings fall to $3000. c. The higher level of consumption would result in an average monthly balance of $12,000. In this case, the opportunity cost of interest foregone has increased, but transactions costs have not. Therefore, a more active money management strategy is called for (due to economies of scale). |
