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Some money questions

Diqiucun_Cunmin
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1/31/2015 10:35:16 AM
Posted: 1 year ago
Why does a decrease in the stock of liquid assets lead to a leftward shift of the Md curve? Also, why does a decrease in liquidity preference lead to an increase in the velocity of circulation of money?

I've got an exam on Monday, and I'm wondering if you guys could help me out (obviously I can't ask my teacher since it's weekend). Thanks. :)
The thing is, I hate relativism. I hate relativism more than I hate everything else, excepting, maybe, fibreglass powerboats... What it overlooks, to put it briefly and crudely, is the fixed structure of human nature. - Jerry Fodor

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ResponsiblyIrresponsible
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2/27/2015 12:12:07 AM
Posted: 1 year ago
At 1/31/2015 10:35:16 AM, Diqiucun_Cunmin wrote:
Why does a decrease in the stock of liquid assets lead to a leftward shift of the Md curve?

A decrease in the stock of liquid assets--or we could just call it the M1 money supply--would increase interest rates, making investment less attractive and savings more attractive. But of note is that this would not cause a shift in the Md curve, but rather a movement along the curve--so not a decrease in money demand, but a decrease in the quantity of money demanded.

Also, why does a decrease in liquidity preference lead to an increase in the velocity of circulation of money?

Liquidity preference is just the desire by the public to hold liquid assets--i.e., cash. So, if that declines, meaning that people aren't holding their assets in the form of cash but perhaps in the form of, say, deposits, velocity will tend to increase because the money multiplier increases as crash holdings decrease.

I've got an exam on Monday, and I'm wondering if you guys could help me out (obviously I can't ask my teacher since it's weekend). Thanks. :)
~ResponsiblyIrresponsible

DDO's Economics Messiah
Diqiucun_Cunmin
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2/27/2015 1:04:39 AM
Posted: 1 year ago
Thanks for the help! :)

At 2/27/2015 12:12:07 AM, ResponsiblyIrresponsible wrote:
At 1/31/2015 10:35:16 AM, Diqiucun_Cunmin wrote:
Why does a decrease in the stock of liquid assets lead to a leftward shift of the Md curve?

A decrease in the stock of liquid assets--or we could just call it the M1 money supply--would increase interest rates, making investment less attractive and savings more attractive. But of note is that this would not cause a shift in the Md curve, but rather a movement along the curve--so not a decrease in money demand, but a decrease in the quantity of money demanded.
That's what I thought too, but the question went like this (it's the fifth multiple-choice question from HKALE 1992, and the question was written by Steven Cheung):
The total demand for money curve, other things being equal, will shift to the left as a result of
(1)an increase in the interest rate.
(2)an increase in the thrift of households.
(3)a decrease in the risk of holding bonds.
(4)a decrease in the stock of liquid assets.
A.(1), (2) and (3) only
B.(1), (2) and (4) only
C.(1), (3) and (4) only
D.(2), (3) and (4) only

The answer was D. I understand why (1) is wrong for very obvious reasons, but (4) does shift the Md curve to the left according to this question.


Also, why does a decrease in liquidity preference lead to an increase in the velocity of circulation of money?

Liquidity preference is just the desire by the public to hold liquid assets--i.e., cash. So, if that declines, meaning that people aren't holding their assets in the form of cash but perhaps in the form of, say, deposits, velocity will tend to increase because the money multiplier increases as crash holdings decrease.
That makes complete sense, thanks!
The thing is, I hate relativism. I hate relativism more than I hate everything else, excepting, maybe, fibreglass powerboats... What it overlooks, to put it briefly and crudely, is the fixed structure of human nature. - Jerry Fodor

Don't be a stat cynic:
http://www.debate.org...

Response to conservative views on deforestation:
http://www.debate.org...

Topics I'd like to debate (not debating ATM): http://tinyurl.com...
ResponsiblyIrresponsible
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2/27/2015 6:43:04 AM
Posted: 1 year ago
At 2/27/2015 1:04:39 AM, Diqiucun_Cunmin wrote:
Thanks for the help! :)
That's what I thought too, but the question went like this (it's the fifth multiple-choice question from HKALE 1992, and the question was written by Steven Cheung):
The total demand for money curve, other things being equal, will shift to the left as a result of
(1)an increase in the interest rate.
(2)an increase in the thrift of households.
(3)a decrease in the risk of holding bonds.
(4)a decrease in the stock of liquid assets.
A.(1), (2) and (3) only
B.(1), (2) and (4) only
C.(1), (3) and (4) only
D.(2), (3) and (4) only

The answer was D. I understand why (1) is wrong for very obvious reasons, but (4) does shift the Md curve to the left according to this question.

Ah, my apologies--but I think I see it now.

So, the movement along the Md curve would result only from a change in the interest rate--so if rates suddenly jump tomorrow, holding the money supply constant (which seems unlikely), we wouldn't be dealing with a shift in the curve. But I guess what they're getting at is interest rates change by shifting the curve to the left. It's not how I recall doing virtually the same problem, to be honest, though I could dig up a paper I wrote a while back using a graph from Mishkin's textbook (that I think most classes use).
~ResponsiblyIrresponsible

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Diqiucun_Cunmin
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2/28/2015 10:35:32 AM
Posted: 1 year ago
At 2/27/2015 6:43:04 AM, ResponsiblyIrresponsible wrote:
At 2/27/2015 1:04:39 AM, Diqiucun_Cunmin wrote:
Thanks for the help! :)
That's what I thought too, but the question went like this (it's the fifth multiple-choice question from HKALE 1992, and the question was written by Steven Cheung):
The total demand for money curve, other things being equal, will shift to the left as a result of
(1)an increase in the interest rate.
(2)an increase in the thrift of households.
(3)a decrease in the risk of holding bonds.
(4)a decrease in the stock of liquid assets.
A.(1), (2) and (3) only
B.(1), (2) and (4) only
C.(1), (3) and (4) only
D.(2), (3) and (4) only

The answer was D. I understand why (1) is wrong for very obvious reasons, but (4) does shift the Md curve to the left according to this question.

Ah, my apologies--but I think I see it now.

So, the movement along the Md curve would result only from a change in the interest rate--so if rates suddenly jump tomorrow, holding the money supply constant (which seems unlikely), we wouldn't be dealing with a shift in the curve. But I guess what they're getting at is interest rates change by shifting the curve to the left. It's not how I recall doing virtually the same problem, to be honest, though I could dig up a paper I wrote a while back using a graph from Mishkin's textbook (that I think most classes use).

Thanks again. I'm guessing decreasing the stock of liquid assets was considered an exogenetic factor with reference to the Md curve, so it was a shift. The holidays will be over on Monday and while I won't have classes, I can still ask my teacher then. I'll tell you what he says if I get to ask him. ^^
The thing is, I hate relativism. I hate relativism more than I hate everything else, excepting, maybe, fibreglass powerboats... What it overlooks, to put it briefly and crudely, is the fixed structure of human nature. - Jerry Fodor

Don't be a stat cynic:
http://www.debate.org...

Response to conservative views on deforestation:
http://www.debate.org...

Topics I'd like to debate (not debating ATM): http://tinyurl.com...
ResponsiblyIrresponsible
Posts: 12,398
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2/28/2015 6:37:17 PM
Posted: 1 year ago
At 2/28/2015 10:35:32 AM, Diqiucun_Cunmin wrote:
At 2/27/2015 6:43:04 AM, ResponsiblyIrresponsible wrote:
At 2/27/2015 1:04:39 AM, Diqiucun_Cunmin wrote:
Thanks for the help! :)
That's what I thought too, but the question went like this (it's the fifth multiple-choice question from HKALE 1992, and the question was written by Steven Cheung):
The total demand for money curve, other things being equal, will shift to the left as a result of
(1)an increase in the interest rate.
(2)an increase in the thrift of households.
(3)a decrease in the risk of holding bonds.
(4)a decrease in the stock of liquid assets.
A.(1), (2) and (3) only
B.(1), (2) and (4) only
C.(1), (3) and (4) only
D.(2), (3) and (4) only

The answer was D. I understand why (1) is wrong for very obvious reasons, but (4) does shift the Md curve to the left according to this question.

Ah, my apologies--but I think I see it now.

So, the movement along the Md curve would result only from a change in the interest rate--so if rates suddenly jump tomorrow, holding the money supply constant (which seems unlikely), we wouldn't be dealing with a shift in the curve. But I guess what they're getting at is interest rates change by shifting the curve to the left. It's not how I recall doing virtually the same problem, to be honest, though I could dig up a paper I wrote a while back using a graph from Mishkin's textbook (that I think most classes use).

Thanks again. I'm guessing decreasing the stock of liquid assets was considered an exogenetic factor with reference to the Md curve, so it was a shift. The holidays will be over on Monday and while I won't have classes, I can still ask my teacher then. I'll tell you what he says if I get to ask him. ^^

That must be it. I just checked my textbook, and it showed the interaction between money supply and demand resulting from both an OMO purchase and an OMO sale, and it behaved exactly as I thought it would--supply shifts, interest rate rises, quantity but not the curve itself changes. I'd be very curious to hear what your teacher has to say on this, though.
~ResponsiblyIrresponsible

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Diqiucun_Cunmin
Posts: 2,710
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3/2/2015 5:06:43 AM
Posted: 1 year ago
I've asked him, and he said a decrease in money stock would decrease wealth and thus transactions demand for money. ;)
The thing is, I hate relativism. I hate relativism more than I hate everything else, excepting, maybe, fibreglass powerboats... What it overlooks, to put it briefly and crudely, is the fixed structure of human nature. - Jerry Fodor

Don't be a stat cynic:
http://www.debate.org...

Response to conservative views on deforestation:
http://www.debate.org...

Topics I'd like to debate (not debating ATM): http://tinyurl.com...
ResponsiblyIrresponsible
Posts: 12,398
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3/2/2015 8:09:05 AM
Posted: 1 year ago
At 3/2/2015 5:06:43 AM, Diqiucun_Cunmin wrote:
I've asked him, and he said a decrease in money stock would decrease wealth and thus transactions demand for money. ;)

So an exogenous decrease in the money stock? I guess that's plausible, but I've never seen a problem like that, lol.
~ResponsiblyIrresponsible

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Diqiucun_Cunmin
Posts: 2,710
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3/2/2015 8:44:34 AM
Posted: 1 year ago
At 3/2/2015 8:09:05 AM, ResponsiblyIrresponsible wrote:
At 3/2/2015 5:06:43 AM, Diqiucun_Cunmin wrote:
I've asked him, and he said a decrease in money stock would decrease wealth and thus transactions demand for money. ;)

So an exogenous decrease in the money stock? I guess that's plausible, but I've never seen a problem like that, lol.

Haha, it makes sense to me too. The HKEAA always uses the 'best answer principle' (i.e. if all four options are wrong, pick the 'least wrong' one, and if two are both correct, pick the 'more correct' one), so I think this question is a case of that.
The thing is, I hate relativism. I hate relativism more than I hate everything else, excepting, maybe, fibreglass powerboats... What it overlooks, to put it briefly and crudely, is the fixed structure of human nature. - Jerry Fodor

Don't be a stat cynic:
http://www.debate.org...

Response to conservative views on deforestation:
http://www.debate.org...

Topics I'd like to debate (not debating ATM): http://tinyurl.com...