Econ 101 HW#3 - Allison Cox Econ 101 Prof Morgan Homework#3...

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Allison Cox Econ 101 Prof. Morgan 7/24/08 Homework #3 Chapter 4 1. The real quantity of money that people demand depends both on real income and on the interest rate. Equilibrium in the money market requires that the real supply of money to be equal to the demand for real money balances. People use money as a tool for purchasing good and services. As income rises, so does the demand for money. Interest rates are determined by the supply of money. If the supply is greater people will purchase bonds causing the interest rate to decrease and vice versa. 4. It is important because induced expenditures are in response to changes in income. If income changes then the crowding out effect takes place. Under normal circumstances, the crowding out effect will actually increase income and lower the interest rate. It depends highly on the slope of the LM curve. Steeper slope has no crowding out and flatter slope will have a bigger crowding out effect. 8. The four channels are the effect of lower interest rates, the influence of lower interest rates on planned expenditures, stock prices and exchange rates. The importance of these
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