Knapp6 - WEEK 6 CH11 Q1 State whether you agree or disagree...

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WEEK 6 CH11, Q1 – State whether you agree or disagree with the following statements and explain why. 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. This statement is false. When the real economy expands (Y rises), the demand for money expands, and the interest rate will increase. This will motivate households to hold less cash than they would have if the interest rate did not change. This will not change the supply of money. b. Inflation, a rise in the price level, causes the demand for money to decline. Because inflation causes money to be worth less, households want to hold less of it. This statement is false. Inflation, an increase in the price level, causes the demand for money to increase. Because inflation causes money to be worth less, households want to hold less of it. c. If the Fed buys bonds in the open market and at the same time we experience a recession, interest rates will no doubt rise. This statement is false. If the Fed buys bonds in the open market, the money supply rises, putting downward pressure on the interest rate. When we experience a recession, the money demand falls putting downward pressure on the interest rate. Thus, interest rates will fall. CH11, Q6 – Illustrate the following situations using supply and demand curves for
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This note was uploaded on 06/15/2010 for the course EC 141DLC taught by Professor Antonifirner during the Fall '09 term at Park.

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Knapp6 - WEEK 6 CH11 Q1 State whether you agree or disagree...

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