Note that the study cited recasts the analysis with

Note that the study cited recasts the analysis with interest-earning checking
deposits in the role of “bonds” and cash in the role of “non-interest-earning checking deposits”. Any factor
that decreases the cost of converting deposits to cash should decrease the optimal amount of cash held.
Towards the end of 1999, there were concerns over the so-called “Y2K” problem. The rumor was spread
that the calendar shift at midnight, Jan. 1, 2000 would cause computer systems (including ATMs) to fail. If
this rumor was believed, how should citizens have reacted? Thinking ahead, how might the Fed have
changed the money supply as the Y2K deadline approached?
E
CONOMICS
I
N
P
RACTICE
(
CONTINUED
): Although most households do not actively trade bonds, most of
us are influenced by interest-earning opportunities (money market accounts, certificates of deposits, and so
on) and do not hold all of our funds as cash or in a checking account. What has the development of debit
cards done to the demand for cash? Some banks now charge fees when cash is withdrawn from an ATM—
what will this do to the optimal amount of cash held?
Practice
11. An increase in the interest rate will the quantity of money demanded for transactions and
the quantity of money demanded for speculation.
12. The demand for money curve will shift to the left when
(a) the interest rate increases.
(b) the price level increases.

18 Study Guide to Principles of Macroeconomics
(c) aggregate output decreases.
(d) the price of bonds is expected to decrease.
ANSWER: (c) Less money will be demanded if the dollar volume of transactions decreases
because of a price level decrease or an output level decrease. Changes (Option (a))
or expected changes (Option (d)) in the interest rate don’t cause a shift in the
position of the demand curve.