Equilibrium and Speculative Balances

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Which of the following economic decisions can have a significant impact on an economy?

Consumption decisions made by households

Investment decisions made by corporations

Decisions made by governments

All of the above (correct)

What are the two main types of government policy that can affect the macroeconomy and financial markets?

Investment policy and taxation policy

Monetary policy and taxation policy

Monetary policy and fiscal policy (correct)

Investment policy and fiscal policy

Which of the following is true about the impact of a single household's consumption decisions on the wider economy?

A single household's consumption decisions can only affect employment

A single household's consumption decisions can only affect profits

A single household's consumption decisions have a negligible impact on the wider economy (correct)

A single household's consumption decisions can have a significant impact on the wider economy

What is the role of fiscal policy?

To make decisions about taxation and spending Signup and view all the answers

Which of the following is NOT one of the important functions of money mentioned in the text?

Serving as a measure of value for goods and services Signup and view all the answers

What was the role of goldsmiths in the evolution of money?

They stored excess gold for individuals and issued receipts Signup and view all the answers

What is the process of lending customers' money to others on the assumption that not all customers will want all of their money back at any one time called?

Fractional reserve banking Signup and view all the answers

In a hypothetical scenario where a bank retains only 10% of any money deposited with them as reserves, what would be the initial balance sheet of the bank if a customer deposits €100?

Assets: €100, Liabilities: €100 Signup and view all the answers

According to the text, what happens to speculative balances in equilibrium?

They tend to decrease Signup and view all the answers

According to the text, what is the price of money in the money market?

The nominal interest rate Signup and view all the answers

According to the text, why is the supply curve for money vertical?

Because the supply of money is fixed Signup and view all the answers

According to the text, what happens to the interest rate in the money market when there is excess demand for money?

It rises Signup and view all the answers

According to the quantity theory of money, which of the following equations represents the relationship between money and the price level?

$M \times V = P \times Y$ Signup and view all the answers

What does money neutrality imply?

An increase in the money supply does not affect real output or the velocity of money Signup and view all the answers

Which of the following motives for holding money refers to money held to provide a buffer against unforeseen events?

Precautionary Signup and view all the answers

What does the speculative demand for money depend on?

The potential opportunities or risks in other financial instruments Signup and view all the answers

Which of the following is NOT a function of money?

Measure of value Signup and view all the answers

What are the qualities that money needs to have to act as a medium of exchange?

Readily acceptable, have a known value, easily divisible, have a high value relative to its weight, difficult to counterfeit Signup and view all the answers

Which asset often fulfilled the role of medium of exchange in early societies?

Precious metals Signup and view all the answers

What is the overarching goal of both monetary and fiscal policy?

To create an economic environment with stable and positive growth and low inflation Signup and view all the answers

According to the text, what is the formula for calculating the total amount of money 'created' from a deposit in the banking system?

New deposit/Reserve requirement = €100/0.10 = €1,000 Signup and view all the answers

What is the money multiplier in the example provided in the text?

1/0.10 = 10 Signup and view all the answers

What is the definition of money according to the text?

Money is any medium that can be used to purchase goods and services. Signup and view all the answers

What is the difference between credit card payments and payments made by cheques and debit cards according to the text?

Credit card payments involve deferred payment, while cheque and debit card payments do not. Signup and view all the answers

According to money neutrality, which of the following statements is true?

The money supply does not affect the required real rate of interest but affects inflation and inflation expectations Signup and view all the answers

What is the formula for nominal interest rate (Rnom) in an economy?

$Rnom = Rreal + \pi_e$ Signup and view all the answers

What is the distinction between expected inflation and unexpected inflation?

Expected inflation is the level of inflation that economic agents expect in the future, while unexpected inflation is the component of inflation that is a surprise Signup and view all the answers

In a world where all prices in an economy are perfectly indexed to inflation, how would economic agents perceive inflation?

Economic agents would be indifferent to the rise in prices Signup and view all the answers

What are the costs of inflation primarily centered on?

The distinction between expected inflation and unexpected inflation Signup and view all the answers

What has been the general perception of inflation since the 1970s?

Inflation has been seen as a negative thing Signup and view all the answers