Exam 7: The Asset Market, Money, and Prices

Suppose that the money supply and real GDP in 2006 were $80 billion and $220 billion, respectively. In 2007, the central bank increased money supply to $88 billion and real GDP rose to $231 billion. Assume the income elasticity of money is 0.5. a. What are the rates of growth in money supply and real GDP? b. What is the inflation rate? c. If, in 2008, the money supply level remains the same level as 2007, but real GDP grows at another 5 percent, what will be the inflation rate in 2008?

Suppose the money demand function is M^d/P = 1000 + 0.2Y - 1000i. a. Calculate velocity if Y: 2000 and i = 0.10. b. If the money supply (M^s) is 2600, what is the price level? c. Now suppose the nominal interest rate rises to 0.15, but Y and M^s are unchanged. What happens to velocity and the price level? So if the nominal interest rate were to rise from 0.10 to 0.15 over the course of a year, with Y remaining at 2000, what would the inflation rate be?

An introduction of ATM (automatic teller machines), other things being constant,

A developing country does not have enough taxes to cover its expenditures and is unable to borrow. This government would be most likely to cover its deficit by

Which of the following statements about M1 and M2 is not true?

Between 1992 and 2002 Mr. Junius Morgan's real income increased from $100,000 to $200,000. All else being equal, his real demand for money probably

Under a situation of asset market equilibrium,

AAA Company stock has a higher expected rate of return than ZZZ Company stock. All else being equal, you would expect that relative to ZZZ, AAA company stock provides

The use of money is more efficient than barter because the introduction of money

Velocity of money is

During the past year, Lotusland saw an increase in the price level and increase in interest rates on financial assets, but a fall in personal incomes. The overall demand for money fell. Which of the following factors was most likely to have contributed to this fall in the demand for money?

Suppose the real money demand function is M^d/P = 2000 + 0.2Y - 10,000 (i - i^m). Assume M = 4000, P = 2.0, i^m = .04, π^e = .03, and Y = 5000. The real interest rate that clears the asset market is

A system in which people trade goods they don't want to consume for goods they do want to consume is called

If there is a financial panic and increased uncertainty about the returns in the stock market and bond market, what is the likely effect on money demand?

If the interest elasticity of money demand is -1/4, by what percent does money demand rise if the nominal interest rate rises from 4% to 5%?

An increase in the real interest rate would cause an increase in the real demand for money

What happens to real money demand (rises, falls, no change) due to a change in each of the following factors? a. A tax on stock market transactions is introduced. b. Computerized bond trading reduces transaction costs. c. People's average level of wealth rises. d. The threat of a recession increases the riskiness of stocks and bonds. e. The interest rate paid on chequing account balances declines. f. The price level falls in a one-time jump.

If the income elasticity of money demand is 3/4, by what percent does money demand rise if income rises 10%?

Which of the following is true about the asset market equilibrium?

What happens to M1 and M2+ due to each of the following changes? a. You take $500 out of your chequing account and put it into a passbook savings account. b. You take $1000 out of your chequing account and put it into a current account. c. You take $1500 out of your money-market mutual fund and deposit into your chequing account. d. You cash in $2000 in savings bonds and invest the money in a certificate of deposit.