Consider an economy with five assets: 1) Cash 2) Checking Accounts 3) Savings and Money-Market Accounts 4) Bonds 5) Stocks. M1 includes asset classes 1 and 2, and M2 is the sum of M1 and asset class 3. All else being equal, how would each of the following changes affect demand for M1? And for M2? Explain.
(a) The stock market crashes, and investors who were previously excited about prospective gains now view it as too risky.
(b) Authorities intensify the fight against street crime, leading to more arrests and convictions for robbery. As crime rates fall, people feel safer holding cash.
(c) Banks introduce overdraft protection, under which funds are automatically transferred from savings to checking as needed to cover checks.
(d) Due to an increase in inflation expectations, the average interest rate on bonds rises from 3% to 6%.
(e) The government introduces deposit insurance, guaranteeing checking, and savings deposits in the event that there are depositor runs and banks fail.
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Consider an economy with five assets: 1) Cash 2) Checking Accounts 3) Savings and Money-Market Accounts 4) Bonds 5) Stocks. M1 includes asset classes 1 and 2, and M2 is the sum of M1 and asset class 3. All else being equal, how would each of the following changes affect demand for M1? And for M2? Explain.
(a) The stock market crashes, and investors who were previously excited about prospective gains now view it as too risky.
(b) Authorities intensify the fight against street crime, leading to more arrests and convictions for robbery. As crime rates fall, people feel safer holding cash.
(c) Banks introduce overdraft protection, under which funds are automatically transferred from savings to checking as needed to cover checks.
(d) Due to an increase in inflation expectations, the average interest rate on bonds rises from 3% to 6%.
(e) The government introduces deposit insurance, guaranteeing checking, and savings deposits in the event that there are depositor runs and banks fail.
Ā
