1The money demand curve is shown in a graph with interest rate on short term ass
ID: 2495982 • Letter: 1
Question
1The money demand curve is shown in a graph with interest rate on short term assets on the vertical axis. Why use short-term interest on the vertical axis and not the rate of return on other financial asset? 2what will happen to the money supply is Jamie withdraws $400 from her chewing account and reserve ratio is 5% 3 Using gold as an example, what is the difference between commodity money and commodity backed money? 4Suppose the annual inflation rate at 7% and 3% of the labour force is unemployed. If you were on the governing council of the bank of Canada, what action would you prescribe? How would this affect the economy, the inflation rate and the unemployment rate?
1The money demand curve is shown in a graph with interest rate on short term assets on the vertical axis. Why use short-term interest on the vertical axis and not the rate of return on other financial asset? 2what will happen to the money supply is Jamie withdraws $400 from her chewing account and reserve ratio is 5% 3 Using gold as an example, what is the difference between commodity money and commodity backed money? 4Suppose the annual inflation rate at 7% and 3% of the labour force is unemployed. If you were on the governing council of the bank of Canada, what action would you prescribe? How would this affect the economy, the inflation rate and the unemployment rate? 1The money demand curve is shown in a graph with interest rate on short term assets on the vertical axis. Why use short-term interest on the vertical axis and not the rate of return on other financial asset? 2what will happen to the money supply is Jamie withdraws $400 from her chewing account and reserve ratio is 5% 3 Using gold as an example, what is the difference between commodity money and commodity backed money? 4Suppose the annual inflation rate at 7% and 3% of the labour force is unemployed. If you were on the governing council of the bank of Canada, what action would you prescribe? How would this affect the economy, the inflation rate and the unemployment rate?
Explanation / Answer
(1) This is because demand for money is primarily influenced by interest rate on short term assets and income level. As short term interest rate falls (rises), opportunity cost of holding money rises (falls) and so, demand for money rises (falls). The same relationship doesn't hold true for interest rate on other financial assets.
(2) **You must be meaning Checking Account & not Chewing Account!**
Money multiplier (MM) = 1 / Reserve ratio = 1 / 0.05 = 20
So, as checking account balance falls by $1, money supply falls by $20.
As checking account balance falls by $400, money supply falls by $20 x 400 = $8,000.
(3) Commodity money such as gold has intrinsic value even if it's not used as money. The commodity is directly used as money. But commodity-backed money can be exchanged on demand for a specific commodity. For example, X dollars can be exchanged for 1 ounce of gold.
NOTE: First 3 questions are answered.
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