Macro Final Exam Questions

Macro Final Exam
Chapter 10: The Money Systems
What assets are considered “Money”? What are the functions of money and the types of money? * W/o money, trade would require barter > Exchanging one good/service for another * unlikely occurrence that two people e/ have a good that other wants * 3 functions * Medium of exchange: an item buyers give to sellers when they want to purchase g/s * Unit of account: the yardstick ppl use to post prices & record debts * Store of value: an item ppl can use to transfer purchasing power from the present to the future * 2 kinds * Commodity money: commodity with intrinsic value, i.e. gold coins * Fiat money: money w/o intrinsic value, used as money b/c of gov’t decree,
PPP implies: the greater a country’s inflation rate, the faster its currency should depreciate (relative to a low-inflation country like Canada) * Interest rate determination in a small open economy w/ perfect Capital mobility * Why do interest rates in Canada & the U.S. tend to move up & down together? * Canada is a small open economy w/ perfect capital mobility * “small” = small part of the world economy * Canada is an economy w/ perfect capital mobility b/c * Can’ns have full access to world financial markets, * And the rest of the world has full access to the Can’n fin’l market * This means that the real interest rate in Canada should equal the real rate prevailing in the world U.S.: r= r^w * Perfect Capital mobility: theory that real interest rate in Canada should equal that in the rest of the world is known as interest rate parity * Limitations: real interest rate in Canada is not always = to the real interest rate in the rest of the world