Chapter 25 money price level and inflation relationship

chapter 25 money price level and inflation relationship

CHAPTER IV. MONEY SUPPLY between the rate of inflation and rate of growth in money supply in The relationship between money supply and price level in . Aug 25,. i.e. Eve of. World. War II. 1. 2. 3. 4. 5. 6. 7. misjon.info supply. This is Chapter 25 in Economics. Answers to the Review (prices are quoted in terms of money), and store of value (money can be held and exchanged .. relationship between money growth and the inflation rate support the quantity theory. THE AGGREGATE DEMAND CURVE Money demand is a function of three AGGREGATE DEMAND, AGGREGATE SUPPLY, AND INFLATION Chapter 25 1. negative relationship between aggregate output (income) and the price level Each 8 THE AGGREGATE DEMAND CURVE An increase in the price level causes.

The FOMC meets every six weeks to formulate monetary policy. Required reserve ratios Discount rate Open market operations 25 The Federal Reserve System The Fed sets required reserve ratios, which are the minimum percentages of deposits that depository institutions must hold as reserves. The Fed does not change these ratios very often. The discount rate is the interest rate at which the Fed stands ready to lend reserves to depository institutions. An open market operation is the purchase or sale of government securities—U.

Treasury bills and bonds—by the Federal Reserve System in the open market. The quantity of deposits that banks can create is limited by three factors: The size of the monetary base limits the total quantity of money that the banking system can create because Banks have desired reserves Households and firms have desired currency holdings And both these desired holdings of monetary base depend on the quantity of money.

The desired reserve ratio is the ratio of reserves to deposits that a bank wants to hold. This ratio exceeds the required reserve ratio by the amount that the bank determines to be prudent for its daily business. Excess reserves equal actual reserves minus desired reserves. People hold some fraction of their money as currency.

So when the total quantity of money increases, so does the quantity of currency that people want to hold. Because desired currency holding increases when deposits increase, currency leaves the banks when they make loans and increase deposits. This leakage of currency is called the currency drain. The ratio of currency to deposits is called the currency drain ratio.

Banks have excess reserves. Banks lend excess reserves. The quantity of money increases. New money is used to make payments. Some of the new money remains on deposit. Some of the new money is a currency drain.

chapter 25 money price level and inflation relationship

Desired reserves increase because deposits have increased. Excess reserves decrease, but remain positive. Figure in the next slide illustrates the process and keeps track of the numbers. The Influences on Money Holding The quantity of money that people plan to hold depends on four main factors: Nominal money is the amount of money measured in dollars. The quantity of nominal money demanded is proportional to the price level—a 10 percent rise in the price level increases the quantity of nominal money demanded by 10 percent.

A rise in the nominal interest rate on other assets decreases the quantity of real money that people plan to hold. Real GDP An increase in real GDP increases the volume of expenditure, which increases the quantity of real money that people plan to hold.

The Demand for Money The demand for money is the relationship between the quantity of real money demanded and the nominal interest rate when all other influences on the amount of money that people wish to hold remain the same. A rise in the interest rate brings a decrease in the quantity of real money demanded.

A fall in the interest rate brings an increase in the quantity of real money demanded. An increase in real GDP increases the demand for money and shifts the demand curve rightward.

The graph interprets the data in terms of movements along and shifts in the demand for money curve. Adjustments that occur to bring about money market equilibrium are fundamentally different in the short run and the long run. The Fed adjusts the quantity of money each day to hit its interest rate target.

This action lowers the interest rate. They try to get more money by selling bonds. This action raises the interest rate. Nominal interest rate equals the equilibrium real interest rate plus the expected inflation rate. Medium of Exchange 23 When you bought your textbook for this course, you were using money as a A store of value. Medium of Exchange 6 7 24 Money as a medium of exchange I. Medium of Exchange 25 Suppose prices are quoted in dollars and transactions are conducted in pesos.

The peso serves as a A medium of exchange. B store of value. C unit of account. D all of the above Topic: Medium of Exchange 26 Barter is an inefficient means of exchange because A barter transactions require a double coincidence of wants. B barter only occurs in relatively primitive economies.

C demand will not necessarily equal supply. D in a barter transaction only one party needs to want what the other party has to sell. Medium of Exchange 27 The unit of account A is a type of accounting of how many currency units there are in an economy. B is an accounting of the total units of goods and services produced in an economy. C is an agreed measure for stating the prices of goods and services in an economy. D is a type of value stored within all assets. Unit of Account 7 8 28 Which function of money refers to the use of money to state the prices of goods and services?

A medium of exchange B unit of account C store of value D means of payment Topic: Unit of Account 29 Which of the following applies to the use of money as a unit of account? A unit of account is an agreed measure for stating the prices of goods and services. Using money as a unit of account creates a simplified pricing system.

Economies choose many goods as units of account. B a unit of account. C a store of value. D a time deposit. This is an example of using the function of money known as A medium of exchange. Unit of Account 32 Suppose prices are quoted in dollars and transactions are conducted in pesos. The dollar serves as a A medium of exchange. Unit of Account 33 Suppose that I find out from an L.

B unit of account. D double coincidence of want. Unit of Account 34 As a unit of account, money is used to A state prices of all goods and services.

B pay off future debts. C hold purchasing power over time. D exchange for goods and services. Given this fact, we would expect to observe A no one ever smoking a cigarette. B people usually resorting to barter rather than using cigarettes as money. C prices of other goods expressed in terms of cigarettes. D only government-issued cigarettes being accepted as money. Unit of Account 36 Catherine compares the prices of candy bars in order to get the "best buy. Unit of Account 37 Frank spends Saturday afternoon at the Dodge dealership looking at new trucks.

The fact the price is quoted in dollars is an example of money as a A medium of exchange. B unit of account C store of value. D All of the above answers are correct. Unit of Account 10 11 38 In a world with no money, costs are expressed in terms of other goods.

If one video game costs two hamburgers, and a hamburger costs three sodas, how many sodas would it take to buy a video game?

chapter 25 money price level and inflation relationship

Unit of Account 39 Which of the following is an example of using money as a store of value? Store of Value 40 When you toss your spare quarters into a jar so you can use them later at the laundromat, you are using money in its function as a A medium of exchange. D record keeping device. Store of Value Question history: Modified 10th edition 41 During periods of inflation, which function of money is most severely affected?

A medium of exchange B unit of account C means of payment D store of value Topic: Store of Value 11 12 42 Which of the following applies to an object serving as a store of value? If an object can be held and exchanged later for a good or service, it serves as a store of value. The less stable an object's value, the better it serves as a store of value.

A work of art can serve as a store of value. Store of Value 43 If an economy tried to use bananas as money, which function would bananas likely have the most difficult time fulfilling? A a store of value B a unit of account C a medium of exchange D a means of payment Topic: New 10th edition 44 Which of the following applies to money when it serves as a store of value? Money is a store of value because it is an agreed measure for stating goods' prices. The more stable money's value, the better it serves as a store of value.

When money serves as a store of value, it requires a double coincidence of wants. Store of Value 12 13 45 Nicholas is saving money collected from his paper route in order to purchase a new bicycle.

His saving represents using money as A a medium of exchange. Store of Value 46 U. A is less efficient than barter B includes tobacco C is the sum of M1 and M2 D is composed of the bills and coins that we use today Topic: B deposits at banks only. D currency and deposits at banks. B part of money.

chapter 25 money price level and inflation relationship

C small in volume relative to currency in circulation. D quite different from checking accounts. Money in the United States Today 13 14 49 Which of the following is money? A checking deposits B checks in the checkbook C credit cards D All of the above are money. Money in the United States Today 50 Which of the following counts as part of money? Money in the United States Today 51 Which of the following correctly completes this statement?

Money in the United States includes A the sum of all money incomes. B the cash in banks plus the sum of all checks written.

C the currency and bank deposits outside of banks. D the sum of currency, deposits, and bonds held by the public and by the banking industry. B not money because they are an intangible. C money only because they are insured by the FDIC. D not money until they are converted into currency.

Money in the United States Today 14 15 53 M1 includes A currency, checking deposits and traveler's checks. B money, stocks and bonds. C money, checking deposits and traveler's checks. D money market mutual funds, stocks and bonds. B currency and demand deposits, including traveler's checks. C only demand deposits and time deposits. D checking accounts, savings accounts and Treasury bills. B liquidity and in which the most liquid asset is money. C money and includes both savings deposits and currency.

D money and includes both savings deposits and money market mutual funds.

AGGREGATE DEMAND, AGGREGATE SUPPLY, AND INFLATION Chapter 25 1.

A currency held outside banks B time deposits C traveler's checks D checking deposits at savings and loans Topic: A checking deposits owned by individuals and businesses B traveler's checks C deposits in money market mutual funds D currency owned by individuals and businesses Topic: A currency B checking deposits owned by individuals C saving deposits D traveler's checks Topic: A currency held outside banks B currency held in bank vaults C checking deposits at commercial banks D checking deposits at credit unions Topic: A checking deposits B currency C traveler's checks D savings deposits Topic: A currency held by the public B time deposits C checking deposits D travelers checks Topic: The value of M1 is.

A does not include currency B does not include traveler's checks C is a broader measure of money than M1 D does not include checking deposits held at credit unions Topic: A currency held by banks B money market mutual fund balances C savings deposits D checkable deposits Topic: A checking deposits B traveler's checks C time deposits D shares of the stocks of large companies Topic: B larger than M1.

C equal to M1, given full employment. D equal to M1, but only when all three functions of money apply. C M1 and M2. D neither M1 nor M2. Modified 10th edition 19 20 73 Currency held outside the banking system is included A in M1 but not M2.

B in M2 but not M1. C in both M1 and M2. D in neither M1 nor M2. B M2 is approximately equal to M1. C M2 is larger because it contains M1 and other assets. D M2 is larger because it contains more liquid assets than does M1. Money in the United States Today, M1 and M2 75 Suppose you cash in a Certificate of Deposit a small time deposit to acquire the traveler's checks you'll need for your vacation.

What happens to M1 and M2? A M1 and M2 both increase. B M1 stays the same and M2 increases. C M1 increases and M2 decreases.

AGGREGATE DEMAND, AGGREGATE SUPPLY, AND INFLATION Chapter ppt download

D M1 increases and M2 stays the same. Money in the United States Today, M1 and M2 78 A new financial innovation results in people switching their funds from checking deposits to savings accounts.

The quantity of M1 and the quantity of M2. A decreases; decreases B increases; decreases C decreases; does not change D decreases; increases Topic: Money in the United States Today, M1 and M2 Component Amount billions of dollars Money market mutual fund deposits 4, Time deposits 1, Savings deposits 1, Checking deposits Currency Based on the data in the table above, what is the value of M1? Money in the United States Today, M2 Component Amount billions of dollars Currency Checking deposits Savings deposits Traveler's checks 8 Time deposits 1, Money market mutual funds Available credit on credit cards According to the table above, the value of M1 is and the value of M2 is.

Money in the United States Today, M1 and M2 22 23 Component Amount billions of dollars Currency Checking deposits Savings deposits Traveler's checks 10 Time deposits 1, Money market mutual funds 1, Available credit on credit cards According to the table above, the value of M1 is and the value of M2 is.

Money in the United States Today, M1 and M2 83 Liquidity is the A speed with which the price of an asset changes as its intrinsic value changes. B inverse of the velocity of money. C same as the velocity of money. D ease with which an asset can be converted into money.

Liquidity 84 Liquidity is the A degree to which an asset acts as money without a loss of value. B ease with which an asset can be converted into a means of payment with little loss of value. C degree to which money can be converted into an asset with little loss of value. D ease with which credit cards are accepted as a means of payment. Liquidity 23 24 85 Liquidity is the same as A easy conversion of money to an asset, allowing for loss of value. B diversification of an investor's store of value.

C easy conversion of an asset to a means of payment, allowing for loss of value. D easy conversion of an asset to a means of payment, with little or no loss of value. Liquidity 86 A highly liquid asset A has high transaction costs associated with its sale. B is highly leveraged.

C generally has a very limited market for its resale. D can be converted into a means of payment easily without loss of value. A increases when a country owns gold B increases when a consumer has more credit cards C is how quickly an asset loses its worth D is the property of being instantly convertible into money Topic: Liquidity 88 In the list of assets below, which is the most liquid?

Modified 10th edition 24 25 89 An individual wanting the most liquid asset possible will hold A currency. B a savings account. Liquidity 90 Which of the following is the most liquid? B the funds in your checking account. D your friend's house. Liquidity 91 Which of the following is the most liquid? B your credit card. D the pencil or pen in your hand right now. Liquidity 92 Which of the following is the most liquid asset? A money B land C a government bond D a share of stock Topic: Liquidity 25 26 93 Checks money and credit cards money.

A are; are B are not; are C are; are not D are not; are not Topic: Checks Are Not Money Question history: Modified 10th edition 94 Which of the following is NOT money? A currency B checking deposits C checks in the checkbook D All of the above are money. C only part of M2 but not part of M1.

D part of M1 but not part of M2. Checks Are Not Money 96 Which of the following is true? Checks are considered money because they can be used as a medium of exchange. Checks represent a transfer of money. Checks Are Not Money 26 27 97 Checks money and checking deposits money. A are; are B are; are not C are not; are D are not; are not Topic: B are merely instructions to transfer money.

C have value in exchange but little intrinsic value. D are not backed by either gold or silver. C money and are the largest part of the money supply. D not money because they are not made of paper. B a part of M1 but not of M2. C a part of money because they are used to purchase goods and services. D a part of M2 but not a part of M1. Credit Cards Are Not Money 27 28 Credit cards are A a part of money because they are used in so many transactions.

B a part of money when the transaction approach is used but not when the liquidity approach is used. C not part of money because they represent a loan of money to the user. D not part of money because the government has no control over the amount of credit outstanding. B a barter exchange. C using any other form of money because you immediately get to take the goods home.

D writing a check on your demand deposit account. B are not issued by the government. C do not serve as a unit of account. D are ID cards that make borrowing easier. B are not the means of payment. C typically require an identification check, such as your driver's license.

D are not backed by all commercial banks. A medium of exchange B barter C unit of account D store of value Topic: Study Guide Question, Barter The fact that money can be exchanged for goods reflects money's role as a A cause of inflation. B medium of exchange. D store of value. Study Guide Question, Medium of Exchange 29 30 2 Depository Institutions 1 Which of the following is considered a depository institution? Treasury B a commercial bank C a money market mutual fund D a thrift institution, such as a savings and loan association Topic: Depository Institutions 3 A depository institution is a firm that takes deposits from and makes loans to.

A households and firms; other households and firms B firms; households C households; firms D firms; other firms Topic: Depository Institutions 30 31 4 A depository institution is A the lender of last resort. B an insurance agency, such as the FDIC.

25 CHAPTER Money, the Price Level, and Inflation. - ppt video online download

C the most powerful body within the Federal Reserve. D as a financial that accepts deposits from households and firms. Depository Institutions Question history: Modified 10th edition 5 Depository institutions A make profit from the spread between the interest rate they pay on deposits and the interest rate they receive on loans. B make a profit according to how much the Federal Reserve pays them. C make their profit by charging the government for their services.

D make zero profit but receive compensation by the government because their services are so valuable. Modified 10th edition 6 The major role of a commercial bank is to A make mortgage loans. B sell shares and use the proceeds to buy stocks. C receive deposits and make loans. D restrain the growth of the quantity of money.

Commercial Banks 7 Commercial banks do not A buy U. B accept deposits from their customers. C make loans to creditworthy individuals and businesses. D determine what assets are money. Commercial Banks 31 32 8 Modern U. B issue paper currency. C make loans to households and business firms.

D accept savings deposits. Commercial Banks 9 A savings bank is a depository institution that. A sells shares which it uses to purchase shares in U. Treasury bills B makes mostly home-purchase loans C is owned by a social or economic group D makes mostly consumer loans Topic: Savings Banks Question history: Modified 10th edition 10 Examples of thrift institutions include A savings deposits and checking deposits. B commercial banks, savings and loan associations, and insurance companies.

C savings and loan associations, savings banks, and credit unions. D money market mutual funds, commercial banks, and credit unions.

Thrift Institutions 11 A credit union is A a combination of credit card corporations. B an depository institution owned by members of a particular group. C a thrift institution that issues credit cards. D a commercial bank owned by its depositors. Credit Union Question history: Modified 10th edition 32 33 12 Money market mutual funds invest in A residential mortgages.

B commercial real estate. C long-term government securities.