Chapter 13 Homework

Key Question 4
The components of M1 are;
- Currency
- All checkale deposits
The largest component is checkable deposits, by a small margin.
The face value of a coin is greater than its intrinsic value because the recipient is confident that they will be able to exchange the coin for a good of the same value.
Near-monies included in M2 are "certain highly liquid financial assets that do not function directly or fully as a medium of exchange but can be readily converted into curreny or checkable deposits." (McConnell and Brue, 247)
M2 and M3 money supplies are distinguished by their lack of liquidity.

Key Question 6

D=1/P

D=1/1.25

D=0.8

If instead;
D=1/0.5

D=2

From this, we can draw the conclusion that there is an inverse relationship between the purchasing power of the dollar and the price level.

Key Question 7
The basic determinant for the transactions demand is the level of nomial GDP.
The basic determinant for the asset demand for money is the interest rate.
We can add these two, horizontally, to graphically show the asset demand against transaction demand. The result is a downwards sloping curve. The equilibirum interest rate is then determined at the intersection between this curve and the money supply.
a) the expanded use of credit cards may increase the demand for money, and thus the interest rate will decrease.
b) a shortening of worker pay period may increase the demand for money, and thus the interest rate will decrease.
c) an increase in nominal GDP signals an increase in the demand for money, and thus the interest rate will decrease.