ECO 211 WCC Final Exam Study Guide 62 Questions with Verified Answers,100% CORRECT
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Course
ECO 211 WCC
Institution
ECO 211 WCC
ECO 211 WCC Final Exam Study Guide 62 Questions with Verified Answers
Why do we assume that the money supply curve is vertical? - CORRECT ANSWER Because interest rates don't affect it
How do changes in the money supply affect the money supply curve? - CORRECT ANSWER Move it right or left--- M...
ECO 211 WCC Final Exam Study Guide 62 Questions with
Verified Answers
Why do we assume that the money supply curve is vertical? - CORRECT ANSWER
Because interest rates don't affect it
How do changes in the money supply affect the money supply curve? - CORRECT
ANSWER Move it right or left--- Money supply curve is vertical (interest rates do
not affect it)
Explain the difference between the transactions and asset demand for money.
Link them to the appropriate measure of the money supply - CORRECT ANSWER
The transaction demand for money stems from its function as a medium of
exchange
We need to have money to make our day-to-day purchases.
• That demand doesn't really depend on the interest rate.
Therefore the transactions demand is vertical.
• Anytime the value of the goods and services produced changes our demand for
money changes.
Changes in NGDP shift the transactions demand curve.
The asset demand for money stems from its function as a store of value.
Money is an asset like stocks and bonds.
Strength: It rarely drops in value precipitously.
Weakness: It doesn't earn any interest.
• The asset demand does depend on the interest rate. The interest rate is the
opportunity cost of holding your wealth as
money. The asset demand curve has a negative slope.
What is transactions demand and what factors shift it - CORRECT ANSWER * $$ as
a medium of exchange
*value of goods and services can shift it (AKA Nominal GDP)
*not really volatile
What is the asset demand curve and how do interest rates affect the transactions
demand for money - CORRECT ANSWER *Money serving as a store of value
, * interest rate can shift it
*volatile
how do contractionary and expansionary policies affect the money market -
CORRECT ANSWER Contractionary--> decreases supply in money market (higher
interest rates)
Expansionary----> Increases supply in money market (lower interest rates)
What are the limitations on the Fed's ability to set both interest rates and the
money supply? - CORRECT ANSWER The Fed can increase the monetary base, but
it can't force banks to lend.
* It can't perfectly predict the change in interest rates unless it knows the exact
slope of the money demand curve.
* It can't simultaneously select the money supply and interest rate.
Define the following terms for a bond: maturity, face value, and price. - CORRECT
ANSWER • Maturity - the length of time you need to wait to redeem the bond
• Face value - the amount of money for which the bond can be redeemed at
maturity
• Price - what someone is willing to pay for the bond now
What is the relationship between bond prices and interest rates? - CORRECT
ANSWER Bond prices and interest rates are inversely related
how do changes in the economy affect the foreign exchange market? - CORRECT
ANSWER When there is a recession, the interest rates will fall. It will cause the
depreciation of the foreign capital. When there are fewer interest rates and less
foreign capital, the value of the currency will start to decrease. As the result,
there will be a lower exchange rate.
when there is an increase in the interest rate (expansion), the lenders will expect
higher rates. The result is obvious. It will attract more foreign capital. With more
foreign capital, there will be a rise in the exchange rates.
How do changes in monetary policy affect interest rates and the exchange rate? -
CORRECT ANSWER Expansionary monetary policy----> lower interest rates, lower
exchange rate
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