Explain how the money market responds to a shortage of money or to a surplus of money.
What will be an ideal response?
In the money market, the demand for money and the supply of money determine the interest rate. Graphically, the demand for money is a down sloping line and the supply of money is a vertical line, and their intersection determines the interest rate. Disequilibrium in this market (a shortage or a surplus of money) is corrected by changes in bond prices and their inverse relationship with interest rates. If there is a shortage of money, bonds will be sold. The increase in supply of bonds will drive down bond prices causing interest rates to rise until the shortage is eliminated. If there is a surplus of money, bonds will be bought. The increased demand for bonds will drive up bond prices causing interest rates to fall until the surplus is eliminated.
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Accelerator theory refers to the theory of
A) consumption that emphasizes that current consumer spending depends positively on the expected future growth of GDP. B) investment that emphasizes that current investment spending depends positively on the expected future growth of government spending. C) consumption that emphasizes that increases in consumption spending will result, through the multiplier effect, in greater increases in GDP. D) investment that emphasizes that current investment spending depends positively on the expected future growth of GDP.
Referring to the previous question, which of the following best describes the adjustment to the new market equilibrium?
A) Price would fall, causing quantity supplied to decrease until the new equilibrium is reached. B) Price would rise, causing quantity supplied to increase until the new equilibrium is reached. C) Price would fall, causing quantity supplied to increase until the new equilibrium is reached. D) Price would rise, causing quantity supplied to decrease until the new equilibrium is reached.
With respect to efficiency wage models, the efficiency of workers depends
a. positively on the money wage they are paid. b. positively on the real wage they are paid. c. inversely on the age of the workers. d. positively on the unemployment rate.
The assets of a bank include deposits, while the liabilities of a bank include loans
Indicate whether the statement is true or false