Intuition

Question 1

real money demand ______ with income

Answer 1

Increases.

Intuition: As income increases, households want to increase consumption (income effect). In order to do so, they need to hold more money balances.

Question 2

real money demand ______ with nominal interest rate

Answer 2

Decreases.

Intuition: An increase in interest rate increases the cost of holding money since households have more incentive to invest the money.

Question 3

neutrality of money

Answer 3

condition in which changes in money supply do not have any real impact on the economy

Question 4

seigniorage

Answer 4

When the government can just print money, this is the real revenues generated by using the newly printed money to buy goods and services

(in units)

Question 5

seigniorage in modern economies, i.e. when monetary and fiscal branches are separate

Answer 5

1. Fiscal authority generates debt which it sells to private sector
2. Fiscal authority finances government spending with this revenue
3. Monetary authority “monetizes the debt;” it prints money which it uses to buy back the debt from the private sector
4. Monetary authority holds debt but does not collect it