Monetary Policy and Money Supply Concepts
48 Questions
0 Views

Choose a study mode

Play Quiz
Study Flashcards
Spaced Repetition
Chat to Lesson

Podcast

Play an AI-generated podcast conversation about this lesson

Questions and Answers

What is the effect of raising the reserve ratio on the money supply?

  • The money supply remains the same.
  • The money supply increases.
  • The money supply decreases. (correct)
  • The money supply fluctuates unpredictably.

How does the Bank of Canada increase the money supply?

  • By selling government bonds.
  • By decreasing the reserve ratio.
  • By purchasing government bonds. (correct)
  • By raising interest rates.

What happens when the overnight rate is increased?

  • Banks are encouraged to borrow more.
  • The money supply contracts. (correct)
  • The money supply expands.
  • Reserves in the banking system increase.

In what scenario would expansionary monetary policy be used?

<p>To lower the equilibrium interest rate. (D)</p> Signup and view all the answers

What is the primary purpose of conducting open-market operations?

<p>To influence the money supply. (D)</p> Signup and view all the answers

What does a contractionary monetary policy aim to achieve?

<p>Increasing the equilibrium interest rate. (D)</p> Signup and view all the answers

What does the zero lower bound represent?

<p>A natural limit on how low interest rates can go. (B)</p> Signup and view all the answers

What is the primary function of money as a medium of exchange?

<p>To facilitate transactions for goods and services (D)</p> Signup and view all the answers

How does lower borrowing costs affect household and business behavior?

<p>It encourages increased spending and investment. (A)</p> Signup and view all the answers

Which problem does money solve that is inherent in a barter economy?

<p>Indivisibility of goods (B)</p> Signup and view all the answers

Which of the following is NOT considered money in the context of the functions of money?

<p>Real estate properties (D)</p> Signup and view all the answers

What is fiat money?

<p>Legal tender established by government decree (D)</p> Signup and view all the answers

What does the term 'money stock' refer to?

<p>The total quantity of money circulating in the economy (A)</p> Signup and view all the answers

What is the role of the Bank of Canada as a central bank?

<p>To regulate the amount of money in the economy (D)</p> Signup and view all the answers

Which of the following best describes M1+ in the context of money supply classifications?

<p>Currency plus chequable deposits held at banks (B)</p> Signup and view all the answers

What does the Bank of Canada use to influence the economy?

<p>Monetary policy regarding the money supply (D)</p> Signup and view all the answers

How does a flat, elastic demand curve affect the relationship between money supply and interest rates?

<p>It decreases the impact of money supply on interest rates. (B)</p> Signup and view all the answers

What is one primary benefit of monetary policy compared to fiscal policy?

<p>It can be adjusted more quickly without waiting for political consensus. (B)</p> Signup and view all the answers

What does contractionary monetary policy aim to do when applied to an overheated economy?

<p>Cool down the economy by decreasing the money supply. (C)</p> Signup and view all the answers

Which of the following is a measure used to determine inflation rates?

<p>Core inflation rate. (A)</p> Signup and view all the answers

In the context of the Classical Theory of inflation, what primarily determines the value of money?

<p>The supply and demand for money. (B)</p> Signup and view all the answers

What is an effect of a steep, inelastic demand curve on the money supply and interest rates?

<p>Changes in money supply have a significant effect on interest rates. (C)</p> Signup and view all the answers

What do ATMs and credit card usage influence regarding the demand for money?

<p>The liquidity preference of individuals. (B)</p> Signup and view all the answers

Which measure of inflation includes all goods that the average consumer buys?

<p>Headline inflation. (D)</p> Signup and view all the answers

What is the primary determinant of the demand for money according to the quantity theory of money?

<p>The level of prices in the economy (A)</p> Signup and view all the answers

In the long run, what is the effect of an increase in the money supply on real output?

<p>Real output remains unchanged (B)</p> Signup and view all the answers

How is the velocity of money characterized in the explanation of the quantity theory of money?

<p>It is constant and predictable (A)</p> Signup and view all the answers

What equation represents the relationship defined by the quantity theory of money?

<p>MV = PY (D)</p> Signup and view all the answers

What does monetary neutrality imply regarding the effect of the money supply on real variables?

<p>Changes in the money supply have no effect on real variables (D)</p> Signup and view all the answers

What happens when the central bank increases the money supply rapidly?

<p>Inflation rate increases (D)</p> Signup and view all the answers

Which of the following is a key element in explaining the equilibrium price level?

<p>Stable velocity of money (C)</p> Signup and view all the answers

According to the quantity theory of money, what is the relationship between the money supply and price level changes?

<p>Increasing money supply leads to inflation (D)</p> Signup and view all the answers

What does the term 'shoe-leather costs' refer to in the context of inflation?

<p>Costs related to managing cash due to inflation (B)</p> Signup and view all the answers

Which of the following accurately describes the impact of high, unpredictable inflation?

<p>It makes savers worse off and borrowers better off. (B)</p> Signup and view all the answers

Which statement is true about deflation?

<p>It is less common than inflation. (D)</p> Signup and view all the answers

What is the formula for calculating the real interest rate?

<p>Real interest rate = Nominal interest rate - Inflation rate (C)</p> Signup and view all the answers

What does 'disinflation' signify?

<p>A decrease in inflation rates while still being positive (B)</p> Signup and view all the answers

Why is moderate inflation considered beneficial for an economy?

<p>It can reduce the risk of deflation. (A)</p> Signup and view all the answers

What does 'tax distortion' (bracket creep) indicate in inflationary environments?

<p>Higher nominal incomes lead to taxpayers entering higher tax brackets. (B)</p> Signup and view all the answers

What characterizes hyperinflation?

<p>It causes prolonged and extreme increases in price levels. (A)</p> Signup and view all the answers

What is the relationship between unemployment and inflation in the short run according to the Phillips curve?

<p>Higher unemployment leads to lower inflation. (D)</p> Signup and view all the answers

What effect does expansionary monetary policy have on employment in the long run?

<p>It temporarily decreases unemployment before returning to prior levels. (C)</p> Signup and view all the answers

What does the long-run Phillips curve suggest about the trade-off between inflation and unemployment?

<p>There is no trade-off between inflation and unemployment in the long run. (A)</p> Signup and view all the answers

During recessionary periods, what is the typical trend concerning inflation?

<p>There is little to no threat of rising inflation. (B)</p> Signup and view all the answers

What does the concept of potential output refer to?

<p>The total output when resources are fully engaged. (D)</p> Signup and view all the answers

What happens to actual output when frictional and structural unemployment occur in an economy?

<p>Actual output falls short of potential output. (B)</p> Signup and view all the answers

What occurs when the central bank increases short-run aggregate demand?

<p>Unemployment initially falls and prices increase. (C)</p> Signup and view all the answers

What is the impact of higher inflation expectations on the economy?

<p>They can lead to permanently higher inflation rates. (C)</p> Signup and view all the answers

Flashcards

Barter Economy

An economy where goods and services are exchanged directly without using money.

Double Coincidence of Wants

The problem of finding someone who wants what you have and has what you want.

Medium of Exchange

An item widely accepted for purchasing goods and services.

Unit of Account

A standard way to compare and express prices.

Signup and view all the flashcards

Store of Value

The ability of money to maintain its purchasing power over time.

Signup and view all the flashcards

Fiat Money

Money created by government decree, not backed by a physical commodity.

Signup and view all the flashcards

Money Stock (Money Supply)

The total amount of money circulating in the economy.

Signup and view all the flashcards

Monetary Policy

Government actions to influence the money supply and interest rates.

Signup and view all the flashcards

Reserve Ratio (R)

The percentage of a bank's deposits that it must keep in reserve. A higher reserve ratio means banks have less money to lend.

Signup and view all the flashcards

Money Multiplier

The ratio of the total money supply to the amount of reserves in the banking system. It's calculated as 1/R.

Signup and view all the flashcards

Open Market Operations

The Bank of Canada's buying or selling of government bonds to influence the money supply.

Signup and view all the flashcards

Expansionary Monetary Policy

Actions by the Bank of Canada to increase the money supply and stimulate economic activity.

Signup and view all the flashcards

Contractionary Monetary Policy

Actions by the Bank of Canada to decrease the money supply and control inflation.

Signup and view all the flashcards

Overnight Rate

The interest rate charged on very short-term loans between commercial banks.

Signup and view all the flashcards

Liquidity-preference Model

A theory that explains the relationship between the quantity of money demanded and the real interest rate.

Signup and view all the flashcards

Zero Lower Bound

The theoretical limit at which nominal interest rates can't go lower (typically near zero).

Signup and view all the flashcards

Demand for Money

The amount of money people want to hold for transactions, precautionary reasons, and speculative purposes.

Signup and view all the flashcards

Equilibrium Price Level

The price level where the demand for money equals the supply of money.

Signup and view all the flashcards

Monetary Injection (Short Run)

Increasing the money supply leads to higher output and prices in the short run, as people spend more.

Signup and view all the flashcards

Monetary Injection (Long Run)

In the long run, increasing the money supply only leads to higher prices, as output returns to its natural level.

Signup and view all the flashcards

Quantity Theory of Money

A theory stating that changes in the money supply directly affect the price level.

Signup and view all the flashcards

Velocity of Money

The average number of times a dollar is spent in a given period.

Signup and view all the flashcards

Nominal Variables

Variables measured in monetary units, like dollar amounts.

Signup and view all the flashcards

Real Variables

Variables measured in physical units, like quantity of goods produced.

Signup and view all the flashcards

Elastic Money Demand

When a change in the interest rate significantly impacts the quantity of money demanded, resulting in a flat demand curve.

Signup and view all the flashcards

Inelastic Money Demand

When a change in the interest rate has little impact on the quantity of money demanded, resulting in a steep demand curve.

Signup and view all the flashcards

Inflation

A general increase in the overall level of prices for goods and services in an economy.

Signup and view all the flashcards

Deflation

A general decrease in the overall level of prices for goods and services in an economy.

Signup and view all the flashcards

Classical Theory of Inflation

A theory that explains inflation as a result of an increase in the money supply relative to the quantity of goods and services produced.

Signup and view all the flashcards

Potential Output

The maximum amount of goods and services an economy can produce when all its resources are fully employed.

Signup and view all the flashcards

Output Gap

The difference between an economy's actual output and its potential output.

Signup and view all the flashcards

Inflation and Full Employment

The goals of maintaining stable prices and ensuring full employment are often difficult to achieve simultaneously.

Signup and view all the flashcards

Phillips Curve

A curve showing the relationship between inflation and unemployment. Short-run: Lower unemployment = Higher Inflation. Long-run: No tradeoff.

Signup and view all the flashcards

Short-Run Phillips Curve

Shows an inverse relationship in the short run: Lower unemployment leads to higher inflation.

Signup and view all the flashcards

Long-Run Phillips Curve

Shows that there's no trade-off between inflation and unemployment in the long run. It's vertical.

Signup and view all the flashcards

NAIRU (Non-Accelerating Inflation Rate of Unemployment)

The rate of unemployment at which inflation remains stable. The long-run Phillips curve represents NAIRU.

Signup and view all the flashcards

Shifting Phillips Curve

The Phillips curve can shift due to changes in inflation expectations, supply shocks, or other factors.

Signup and view all the flashcards

Costs of Inflation

The negative consequences of rising prices, including menu costs, shoe-leather costs, and tax distortions.

Signup and view all the flashcards

Menu Costs

The expenses businesses incur when changing prices to keep up with inflation, including printing new menus, updating online listings, and staff training.

Signup and view all the flashcards

Shoe-Leather Costs

The time, effort, and opportunity costs incurred when people reduce cash holdings and increase frequent trips to the bank to avoid the declining value of their money during inflation.

Signup and view all the flashcards

Tax Distortion (Bracket Creep)

The situation where inflation increases nominal income without a corresponding increase in real purchasing power, pushing individuals into higher tax brackets.

Signup and view all the flashcards

Nominal Interest Rate

The stated interest rate on a loan or investment, not adjusted for inflation.

Signup and view all the flashcards

Real Interest Rate

The actual return on a loan or investment, adjusted for the effects of inflation.

Signup and view all the flashcards

Impact of Inflation on Savers and Borrowers

During inflation, savers lose purchasing power while borrowers benefit, as the real value of their debt decreases.

Signup and view all the flashcards

Study Notes

What is Money?

  • Barter economies exchange goods and services without money, facing problems like double coincidence of wants and indivisibility.
  • Money solves these issues, acting as a medium of exchange, a unit of account, and a store of value.
  • Money is the set of assets used for direct purchases, serving these three essential functions.

Types of Money

  • Fiat money is created by government decree, not backed by a commodity like gold.
  • Examples include banknotes, demand deposits (checking accounts), Canada Savings Bonds, and money market mutual funds.

Money Supply

  • The money supply (money stock) is the amount of money circulating in an economy.
  • Monetary policy, the setting of the money supply by central banks, significantly impacts economic factors.
  • The Bank of Canada (BoC) manages the money supply to maintain a sound economy.
  • Common measures of money supply include M1+ (currency and chequable deposits), M2 (M1+ savings and term deposits), and the monetary base (the "multiplied" component).

Money Creation

  • Banks accept deposits and provide loans.
  • Reserves are funds banks keep in their vaults.
  • Fractional-reserve banking is when banks hold less than 100% of deposits as reserves.
  • Each deposit can create a multiplier effect, expanding the total money supply.

Tools of Monetary Control

  • Central banks utilize reserve requirements, open-market operations (buying/selling government securities), and changes in the overnight rate to control the money supply.
  • Reserve requirements mandate the minimum fraction of deposits banks must hold.
  • Open-market operations adjust the money supply by buying or selling government securities.

Monetary Policy Effects

  • Expansionary monetary policy decreases interest rates, stimulating borrowing and spending.
  • Contractionary monetary policy increases interest rates, reducing borrowing and spending to control inflation.

Inflation and its effects

  • Inflation is an increase in the overall level of prices.
  • Deflation is a decrease in the overall level of prices.
  • The quantity theory of money explains the relationship between the money supply and prices.

The Phillips Curve

  • The Phillips curve shows the short-run relationship between inflation and unemployment.
  • In the long run, there's no tradeoff between inflation and unemployment (long-run Phillips curve).

Open Economy Concepts

  • An open economy interacts with other economies through trade and investment.
  • Exports are domestically produced goods and services sold abroad.
  • Imports are foreign goods and services bought domestically.
  • Balance of trade (net exports) is the difference between exports and imports.
  • International finance involves capital flows between countries (net capital outflow).
  • International capital flows affect interest rates and currency exchange rates.

Exchange Rates

  • Exchange rates are the prices at which one currency is exchanged for another.
  • Exchange rate regimes are the method in which exchange rates are determined or managed (floating or fixed).
  • Factors influencing exchange rates include demand and supply for a currency, interest rates, and government policies.

Global Financial Crises

  • Global financial crises often involve debt crises or exchange rate crises, causing problems for international trade and investment.
  • Organizations like the IMF play a role in helping countries during crises.

Studying That Suits You

Use AI to generate personalized quizzes and flashcards to suit your learning preferences.

Quiz Team

Related Documents

Macro Study 0.5 (3) PDF

Description

This quiz explores key concepts related to monetary policy, including the effects of reserve ratios, open-market operations, and the roles of central banks like the Bank of Canada. Test your understanding of the functions and classifications of money, as well as the impacts of interest rates on economic behavior.

More Like This

Use Quizgecko on...
Browser
Open
Browser
Browser