A) When the real economy expands (Y rises), the demand for money expands. As a result households hold more cash and the supply of money expands.

B) Inflation, a rise in the price level, causes the demand for money to decline. Because inflation causes money to be worthless, households want to hold less of it.

C) If the fed buys bonds in the open market interest rates will no doubt rise.

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Hubert KochLv2

13 Sep 2018

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Related questions

Explain how each of the following developments would affect the supply of money, the demand for money, and the interest rate

A. The Fed's bond traders buy bonds in open-market operations

B. An increase in credit-card availability reduces the amount of cash people want to hold

C. The Federal Reserve reduces banks' reserve requirements

D. Households decide to hold more money to use for holiday shopping

E. A wave of optimism boosts business investment and expands aggregate demand

Choose the correct answer from the brackets:

A)The demand for money is mainly influenced by three variables: r (the short-term interest rate), Y (real GDP), and P (the aggregate Price level). Suppose r rises, but Y and P are unchanged. What happens to the quantity of money demanded?

r is both the opportunity cost of holding money and the reward for holding bonds. Thus, an increase in r causes people to want to hold (more/less ) of their wealth in the form of money and ( more/less) in the form of bonds to take advantage of the higher interest rate.

Suppose real income (Y) rises while the quantity of money in the economy stays the same. What happens to money demand?

The supply of money does not automatically rise when the production of real goods and services (Y) rises. However, the collective demand for money by firms and households does rise. To get this money firms and households attempt to (buy more/ sell some of their /more /less bonds).

Thus, an increase in Y causes people to want to hold (buy more /sell some of their / more /less) of their wealth in the form of money and (buy more / sell some of their / more / less ) in the form of bonds.

C)Suppose the price level (P) rises, but Y and r are unchanged. What happens to money demand?

If Y is unchanged, people will want to buy the same amount of goods and services as before. However, since P is higher, they will need (more / less) money to do so.

Hence, an increase in P causes people to want to hold (more / less) of their wealth in the form of money and (more / less) in the form of bonds.

purplesardine140

Suppose households hold $0.30 in currency for every $1 they have as demand deposits (checking accounts). Also, banks hold 20% of their deposits as reserves.

A. If the Federal Reserve system buys $10 of government bonds from banks, by how much would the following change (include a minus sign if the value falls)?

i. The money supply (MI)

ii. The monetary base

B. Instead of the bonds being sold, suppose that households chose to hold less in currency and more in demand deposits. Explain how that would change:

i. The money supply (MI)

ii. The monetary base

C. Suppose the money supply increases by 3%, the real GDP rises by 2%, and velocity is constant. By how much do prices rise? Explain why or show your work