Exam 7: The Asset Market, money, and Prices

Which of the following measures is the best measure of money as a medium of exchange?

Give five examples of factors that could reduce the demand for money.

Suppose that: 1)The interest on a one-year bond today is 3%; 2)The interest on a one-year bond starting one year from now is expected to be 4% per year; 3)The interest on a one-year bond starting two years from now is expected to be 5% per year; 4)The risk premium on a two-year bond is 0.5%; and 5)The risk premium on a three-year bond is 1.0%. Use that information to answer the following questions. A)According to the expectations theory,what is the interest rate today on a two-year bond? Show your work. B)According to the expectations theory,what is the interest rate today on a three-year bond? Show your work. C)Plot the yield curve

Why is per-capita U.S.currency demand so large? Who is holding large amounts of U.S.currency and why are they doing so? Should U.S.policymakers be concerned about this? Why?

The financial crisis occurred in 2008 in large part because of losses on securities consisting of bundles of mortgage loans known as

The amount by which the expected return on a risky asset exceeds the return on an otherwise comparable safe asset is known as the

The break-even inflation rate is the

A 5% increase in real income usually leads to ________ in money demand.

M2 includes

Suppose the money demand function is given by M^d/P = 640 + 0.1Y - 5000 (r + π^e). Suppose the central bank changes the nominal money supply depending on income and inflation: M^s = 1000 + 0.1Y - 4000π. (a)If expected inflation equals actual inflation = 0.03,Y = 1000,and r = 0.02,calculate the price level. (b)If inflation rises to 0.04 while the other variables remain as in part a,calculate the price level. (c)If expected inflation rises to 0.04 while the other variables remain as in part a,calculate the price level. (d)If the real interest rate rises to 0.03 while the other variables remain as in part a,calculate the price level.