国际经济学TB.doc

Chapter 14Money, Interest Rates, and Exchange Rates (Essay Questions 1. What are the main functions of money? Answer: Money serves in general three important functions: a medium of exchange; a unit of account; and a store of value. As a medium of exchange, money avoids going back to a barter economy, with the enormous search costs connected with it. As a unit of account, the use of money economizes on the number of prices an individual faces. Consider an economy with N goods, then one needs only (N – 1) prices. As a store of value, the use of money in general ensures that you can transfer wealth between periods. 2. What are the factors that determine the amount of money an individual desires to hold? Answer: Three main factors: first, the expected return the asset offers compared with the returns offered by other assets; second, the riskiness of the asset’s expected return; and third, the asset’s liquidity. 3. What are the main factors determining the aggregate money demand? Answer: Three main factors: interest rate, the price level and real national income. A rise in the interest rate causes each individual in the economy to reduce her demand for money. If the price level rises, individual households and firms will spend more money than before. When real national income (GNP) rises the demand for money will rise. 4. Explain why one can write the demand for money as follows: Md ( PL (R, Y) Answer: The aggregate money demand is proportional to the price level. Imagine that all prices in an economy doubled, but the interest rate and everyone’s real incomes remained unchanged. Then, the money value of each individual’s average daily transactions would then simply double, as would the amount of money each wishes to hold. 5. What will be the effects of an increase in the money supply on the interest rate? Answer: An increase in the money supply will cause interest rate to decrease. This should increase investment and possibly consumption of durable goods. The reduction