answerpracticequestions8spring2004

answerpracticequestions8spring2004 - Economics 102 Spring...

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Economics 102 Spring 2004 Answers to Practice Questions 8 1. The demand for money a. is the same as the demand for bonds. b. is the same as the supply for bonds. c. increases whenever the price level falls. d. Increases whenever aggregate income increases. e. shows that people always demand as much money as possible Answer a. although the demand for bonds and the demand for money are related they do not have to be equal b. the supply of bonds is determined by the Fed and is different from the demand for money c. the opposite is true – lower price level will decrease the amount of money needed for routine transactions and which will have a negative effect on the demand for money d. true (assuming other things stay constant) – higher income will lead to higher purchasing power and therefore more money will be needed for transactions; thus, an increase in the demand for money e. not true since holding money carries an opportunity cost of the forgone interest on the bonds 2. Which of the following would be most likely to increase the quantity of money demanded (i.e., to cause a movement along a money demand curve)? a. a decrease in real income b. an increase in real income c. a decrease in the interest rate d. an increase in the cost of converting other assets into money e. an increase in the price level Answer a. see 1.d., shifts the demand curve leftward b. see 1.d., shifts the demand curve rightward c. correct by the definition of the demand curve for money d. irrelevant to the question e. see 1.c. shifts the demand curve rightward 3. In the short-run macro model, an open market purchase of bonds by the Fed will a. raise the interest rate, reduce spending, and increase output. b. raise the interest rate, reduce spending, and decrease output. c. lower the interest rate, reduce spending, and decrease output. d. lower the interest rate, increase spending, and decrease output. e. lower the interest rate, increase spending, and increase output. Answer
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An open market purchase of bonds will increase money supply and lower the interest rate. As a result of lower interest rate, the spending on business and household (e.g., mortgages) investment and consumer durables will increase causing an increase in output (there will be a partial offsetting effect of an increase in the output on the interest rates through an increase in the money demand due to higher real income). 4. Which of the following would lead to a rightward movement along a stationary demand for money curve? a. a decrease in the interest rate b. a decrease in the price level c. an increase in the interest rate d. an increase in the price level e. an increase in real income Answer b, d, and e lead to a shift. a represents a shift in the correct direction: lower interest rates implies a lower opportunity cost of holding money and therefore causes a higher quantity of money demanded. 5.
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answerpracticequestions8spring2004 - Economics 102 Spring...

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