Aggregate Supply - TUT - Questions A and B

7 important questions on Aggregate Supply - TUT - Questions A and B

With which statement would the "No" camp disagree?

  • Money helps markets adjust to equilibrium
  • Money can block the transmission mechanism between interest rates and aggregate demand
  • Money gives people a way not to spend
  • None of the above 

Money helps markets adjust to equilibrium

The "Yes" and "No" camps agree that:

  • Business cycles happen often
  • Money helps markets quickly adjust to equilibrium
  • Markets quickly adjust back to the equilibrium of potential GDP and full employment
  • Money affects prices and inflation 

Money affects prices and inflation

Fiat Money:

  • Is a tradeable product with alternative uses serving as money
  • Includes balances in bank accounts that can be withdrawn on demand
  • Is paper money that can be converted into gold on demand
  • Includes government-issued paper bills 

Includes government-issued paper bills
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Through the domestic monetary transmission mechanism, decreases in money demand cause:

  • Inflation and increased real GDP
  • Deflation and decreased real GDP
  • Deflation and increased real GDP
  • Inflation and decreased real GDP 

Inflation and increased real GDP

How much does money matter for business cycles? According to the 'No, markets left alone fail to adjust' camp.

  • Money has no effect
  • Money helps loanable funds adjust quickly to equilibrium
  • Money adds new internal shocks
  • Money adds new external supply shocks 

Money adds new internal shocks

Interest Rates:

  • For short-term bonds are fixed
  • For short-term bonds tend to rise when interest rates for long-term bonds fail
  • Are usually lower on long-term bonds than on short-term bonds
  • Are usually lower on short-term bonds than on long-term bonds.

Are usually lower on short-term bonds than on long-term bonds.

If you deposit $5,000 cash, and your bank chooses to keep 25% of deposits as revenues, it can create:

  • $5,000 in new money
  • $3,750 in new money
  • $2,500 in new money
  • $1,250 in new money 

$3,750 in new money  [5,000 * .25 = # - 5,000]

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