PS 2: CHs 4 & 5

equilibrium in the market for goods & services determines the ______ interest rate, and the expected rate of inflation determines the _______.

ex ante real; ex ante nominal

"financial repression" can occur when a government with __________ inflation, imposes a cap on __________ interest rates.

high inflation; imposes a cap on nominal interest rates i

in the US, bank reserves consist of:

vault cash & deposits at the federal reserve

if you hear in the news that the Fed conducted open-market-operations (OMOs), then you should expect what to change?

the monetary base B

consider the money demand function: (M/P)^d = kY M = quantity of money P = price level k is a constant Y = real output if money supply is growing at a 10% rate, real output is growing at a 3% rate, and k is constant. what's the avg inflation rate?

7% HOW??

the right of SEIGNIORAGE is the right to:

print money

what could the Fed do to increase the monetary base?

purchase securities from a bank (their $ adds more money to the economy)

the Fisher effect, which acknowledges the one-to-one relation btw inflation rate (pi) & nominal interest rate (i), assumes that:

real interest rate, r, is CONSTANT

if the demand for "real money balances" is proportional to real income, velocity will:

remain constant

the inconvenience associated with reducing money holdings to avoid the inflation tax is called:

shoeleather costs bc one could wear out their shoes from taking many trips to the bank for their $

if the Fed announces that it will raise the rate of growth, of the money supply in the future, but doesn't actually change the money supply just yet today:

the nominal interest rate, i, will increase the current price level, P, will increase

inflation tax

the reduction in the value of money (held by the public), caused by inflation aka, a decrease in "purchasing power"

reserve balance accts held by commercial banks, stored @ their regional Federal Reserve Banks, are in one, both, or neither the money supply (M) & the monetary base (B)?

they are NOT part of the money supply M (no reserves) and they ARE part of the monetary base B no, M = C (currency) + D (deposits) yes, B = C (currency) + *R (reserves)*

"financial intermediation" is the process of:

transferring funds from savers to borrowers

the quantity equation for money MV = PY, by itself:

can be thought of as a definition for velocity of money

which are the 3 causes of expected inflation vs. 1 not? - increases menu costs - causes lower real wages - leads to taxing of nominal capital gains that are not real - leads to shoeleather costs

causes of expected inflation: - menu costs - taxing nominal capital gains - shoeleather costs not: - causing lower real wages

when the Fed makes an open-market SALE, the monetary base B:

decreases (sells bonds, for money that it takes)

when k, the "demand for money" parameter, is large, the velocity of money is ______ (small; large), and money is changing hands ______ (infrequently; frequently).

if demand is high, ppl keep money in pockets, it has a small velocity of going around, and it literally exchanges hands v infrequently

if the real interest rate declines by 1% and the inflation rate increases by 2%, the nominal interest rate, i, must:

increase by 1%

the opportunity cost of holding money is the:

nominal interest rate, i

open-market-operations (OMOs) are:

Federal Reserve purchases & sales of gov't bonds

currency in the hands of the public (C) is in one, both, or neither the money supply (M) & the monetary base (B)?

C is in both M & B M = C (currency) + D (deposits) B = C (currency) + R (reserves)

if disposable income (Y-T) is 4,000, consumption is 3,500, government spending is 1,000, and taxes minus transfers are 800, national saving is equal to:

Y = C + I + G Y = 3,500 + I + 1,000 I/S = Y - C - G I/S = Y - 3,500 - 1,000 ???? 300

the inflation tax is paid by:

all holders of money

what is likely to cause a jump up in the price level P, & velocity V?

an increase in autonomous consumption, bc overall output / Y will be larger, so M/P on the other side also increases

"inflation tax" means that:

as the price level rises, the real value of money held by the public decreases

the "ex ante" real interest rate r is equal to the nominal interest rate i

minus the expected inflation (pi e)

evidence from the past 40 yrs in the US, supports the Fisher effect, and it shows that when the inflation rate (pi) is high, the __________ (nominal; real) interest rate tends to be _________ (low; high).

when inflation rate (pi) is high, NOMINAL interest rate, i, tends to also be HIGH

what was partially responsible for a drop in the money multiplier, m, after the Great Recession of 2008-09?

within the money multiplier, the reserve deposit ratio, rr, increased greatly, so more reserves were held than $ loaned out, and this was bc there was a payment of interest on bank reserves (provided an incentive to hold reserves)