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Unformatted text preview: 7. i) Note that real GDP=nominal GDP/price level 8. ii) If an economic agent holds more cash and less deposit, then the bank will have less cash with which they can create money. 9. i) 10. i) Friedman thought that money demand is affected by interest rate. However, not as much as Keynes thought since money is special. 11. ii) With higher interest rate, banks will try to make more loans and reduce reserves. Otherwise they are losing the interest revenue which they could have gained. 12. iii) Whether a financial instrument belongs to M1, M2 or M3 depends on its degree of liquidity. The more liquid the smaller number it bears. Since bonds are not cash, it will belong to either M2 or M3. If it matures early, then it is M2....
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- Spring '08