MacroeconomicsChapter 4

# MacroeconomicsChapter 4 - ANSWERS TO END-OF-CHAPTER...

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CHAPTER 4 Quick Check 1. a. False. b. False. c. False. Money demand describes the portfolio decision to hold wealth in the form of money rather than in the form of bonds. The interest rate on bonds is relevant to this decision. d. True. e. False. f. False. g. True. h. True. 2. a. i=0.05: money demand = \$18,000 i=0.10: money demand = \$15,000 b. Money demand decreases when the interest rate increases because bonds, which pay interest, become more attractive. c. The demand for money falls by 50%. d. The demand for money falls by 50%. e. A 1% increase (decrease) in income leads to a 1% increase (decrease) in money demand. This effect is independent of the interest rate. 3. a. i =100 / \$ P B –1; i =33%; 18%; 5% when \$ P B =\$75; \$85; \$95. b. When the bond price rises, the interest rate falls. c. \$ P B =100/(1.08) ≈ \$93 4. a. \$20= M D =\$100(.25- i ) i =5% b. M =\$100(.25-.15) M =\$10 Dig Deeper 5. a. B D = 50,000 - 60,000 (.35-i) If the interest rate increases by 10 percentage points, bond demand increases by \$6,000. b.

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MacroeconomicsChapter 4 - ANSWERS TO END-OF-CHAPTER...

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