Podcast
Questions and Answers
What is the primary action involved in outright open market operations?
What is the primary action involved in outright open market operations?
- The outright sale or purchase of non-monetary assets by the central bank without a reverse agreement. (correct)
- The central bank buying government securities with an agreement to sell them back at a later date.
- The central bank lending money to commercial banks at a discount rate.
- Adjusting the reserve requirements that banks must hold.
What does the refinancing rate refer to?
What does the refinancing rate refer to?
- The rate at which commercial banks lend money to one another.
- The interest rate at which the Bank of England lends to the UK banking sector on a short-term basis.
- The interest rate at which the European Central Bank lends on a short-term basis to the euro area banking sector. (correct)
- The rate at which non-monetary assets are repurchased at a specified future date.
Why is the money supply curve considered vertical in the supply and demand model for money?
Why is the money supply curve considered vertical in the supply and demand model for money?
- Because the price level is independent of the money supply.
- Because the velocity of money is constant.
- Because the central bank is assumed to fix the quantity of money supplied. (correct)
- Because the demand for money is perfectly elastic.
According to the quantity theory of money, what primarily determines the price level?
According to the quantity theory of money, what primarily determines the price level?
What does the classical dichotomy assert?
What does the classical dichotomy assert?
If the central bank increases the money supply, what is the likely short-run effect on the value of money and the price level?
If the central bank increases the money supply, what is the likely short-run effect on the value of money and the price level?
What is the definition of relative price?
What is the definition of relative price?
How are real wages calculated?
How are real wages calculated?
Which of the following correctly describes the formula for velocity of money (V)?
Which of the following correctly describes the formula for velocity of money (V)?
What is the primary way governments finance spending when they 'print money'?
What is the primary way governments finance spending when they 'print money'?
What is the key characteristic of hyperinflation?
What is the key characteristic of hyperinflation?
According to the Fisher effect, how does an increase in the rate of money growth affect nominal interest rates in the long run?
According to the Fisher effect, how does an increase in the rate of money growth affect nominal interest rates in the long run?
Which of the following is NOT typically considered a cost of inflation?
Which of the following is NOT typically considered a cost of inflation?
What is the 'inflation tax'?
What is the 'inflation tax'?
Which scenario best illustrates the concept of monetary neutrality?
Which scenario best illustrates the concept of monetary neutrality?
Suppose the price of wheat is $2 per kilo and the price of barley is $1 per kilo. What is the relative price of wheat in terms of barley?
Suppose the price of wheat is $2 per kilo and the price of barley is $1 per kilo. What is the relative price of wheat in terms of barley?
How does an increase in the money supply affect the equilibrium in the money market, assuming all other factors are held constant?
How does an increase in the money supply affect the equilibrium in the money market, assuming all other factors are held constant?
If a country experiences hyperinflation, which of the following is most likely to occur?
If a country experiences hyperinflation, which of the following is most likely to occur?
Shoe leather costs are increased during periods of high inflation. What does this term refer to?
Shoe leather costs are increased during periods of high inflation. What does this term refer to?
A country's central bank decides to implement open market operations. To decrease the money supply, what action would the central bank take?
A country's central bank decides to implement open market operations. To decrease the money supply, what action would the central bank take?
During times of unexpected inflation, who is most likely to benefit?
During times of unexpected inflation, who is most likely to benefit?
Which of the following is a nominal variable?
Which of the following is a nominal variable?
Suppose the velocity of money is constant, and the money supply increases by 5%. If real GDP remains constant, what does the quantity theory of money predict will happen to the price level?
Suppose the velocity of money is constant, and the money supply increases by 5%. If real GDP remains constant, what does the quantity theory of money predict will happen to the price level?
What is the primary role of the central bank in managing inflation?
What is the primary role of the central bank in managing inflation?
During a period of deflation, which of the following is most likely to occur?
During a period of deflation, which of the following is most likely to occur?
Flashcards
Open market operations
Open market operations
The outright sale or purchase of non-monetary assets by the central bank without an agreement to reverse the transaction later.
Definition of repurchase agreement
Definition of repurchase agreement
The sale of a non-monetary asset together with an agreement to repurchase it at a set price at a specified future date
Money Market
Money Market
This is the rate banks lend to each other short-term.
Repo Rate
Repo Rate
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Refinancing Rate
Refinancing Rate
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Price rise
Price rise
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Black Market
Black Market
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Quantity theory of money
Quantity theory of money
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Nominal variables
Nominal variables
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Real variables
Real variables
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Classical dichotomy
Classical dichotomy
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Velocity of money
Velocity of money
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Quantity equation
Quantity equation
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Inflation tax
Inflation tax
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Hyperinflation
Hyperinflation
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Increased inflation
Increased inflation
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The Fisher effect
The Fisher effect
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Relative prices
Relative prices
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Real wages
Real wages
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Study Notes
- Monetary control tools of banks are related to money growth and inflation.
Open Market Operations
- Outright open market operations involve the sale or purchase of non-monetary assets by the central bank, without an agreement to reverse the transaction.
Refinancing Rate
- Repurchase agreements involve the sale of a non-monetary asset with an agreement to repurchase it at a set future date and price.
- The repo rate is the interest rate at which the Bank of England lends to the UK banking sector on a short-term basis.
- Money market represents the market in which commercial banks lend money to each other on a short-term basis.
- The refinancing rate is the interest rate at which the European Central Bank lends on a short-term basis to the Euro area banking sector.
Money Growth and Inflation
- Episodes of significant price level rises have occurred in places like former Yugoslavia and Zimbabwe.
- The CPI in Zimbabwe reached 231,000,000% in June 2008.
- Zimbabwe's central bank reported that some goods on the black market had risen by 70,000,000%.
- In Zimbabwe, unskilled workers earned about Z$200,000,000,000 a month, which was about US$10 (€9.20, £6.80) at the time
- The Zimbabwean government issued a Z$100 billion note in July 2008.
Supply and Demand for Money
- The supply curve for money is vertical because the quantity of money supplied is fixed by the central bank.
- The demand curve for money slopes downward, as people want to hold more money when each euro buys less.
- Equilibrium is achieved when the value of money and the price level balance money supply and demand.
- If the price level is higher than equilibrium, demand for money exceeds supply, causing the price level to fall back to equilibrium.
- The intersection of money supply and demand determines the value of money and the price level.
Monetary Injection
- Quantity theory of money asserts that the quantity of money available determines the price level and that the money available growth rate determines the inflation rate.
Classical Dichotomy and Monetary Neutrality
- Nominal variables are measured in monetary units.
- Real variables are measured in physical units.
- Classical dichotomy is the theoretical separation of nominal and real variables.
Effects of Monetary Injection
- A monetary injection shifts the money supply curve to the right.
- With a given example shift, the value of money decreases and the price level increases and makes each euro less valuable.
Relative Prices
- Prices are normally quoted in nominal variables.
- Relative price is expressed in terms of how much one good must be given up in purchasing another
Real Wages
- Real wages are the money wage adjusted for inflation, measured by the ratio of the wage rate to price (W/P).
Velocity of Money
- Velocity of money measures the rate at which money changes hands.
Quantity Equation
- To calculate the velocity of money, divide the nominal GDP by the quantity of money.
- V = (P x Y) / M, where P is the GDP deflator, Y is real GDP, and M is the quantity of money.
- Using the example of an economy that only produces pizza; if the economy yields 100 pizzas a year, that a pizza sells for €10, and that the quantity of money in the economy is €50, made up of 50 €1 coins, then the velocity of money is 20.
- The quantity equation formula can be rewritten as M x V = P x Y.
Inflation Tax
- Government spending (e.g., roads, salaries, transfer payments) requires raising funds through taxes, borrowing, or printing money.
- The inflation tax represents the government revenue raised by creating money.
- Hyperinflation is a period of extreme and accelerating price increases, with monthly rates exceeding 50%.
Hyperinflation Indicators
- Inadequate tax revenue
- Limited ability to borrow
- The government has high spending
- Central Bank using the printing press to pay for its spending.
Fisher Effect
- In the long run, money is neutral, so a change in money growth does not affect the real interest rate.
- Nominal interest rate adjusts one-for-one with changes in the inflation rate.
- An adjustment of the nominal interest rate to the inflation rate is called the Fisher effect
- i = r + π, where t is the nominal interest rate, r is the real interest rate, and π is the inflation rate.
Cost of Inflation
- A fall in purchasing power
- Shoe leather costs
- Menu costs
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