4.5: The Money Market

Question 1

What are the different reasons people demand a certain amount of liquid assets ( money) ?

Answer 1

1. Transaction Demand for Money: people hold money for everyday transactions.
2. Assets Demand for Money: people hold money since it’s less risky than other assets

Question 2

What is the opportunity cost of holding money in your checking account?

Answer 2

The interest you could be earning from other financial assets like stocks, bonds, and real estate.

Question 3

What is the relationship between quantity of money demanded?

Answer 3

There is an inverse relationship

Question 4

When interest rates increase, what happens to the demanded of money ?

Answer 4

It decreases because individuals prefer to have interest earning assets instead

Question 5

When interest decrease, what happens to the quantity demanded of money?

Answer 5

It increases since there is no incentive to convert cash into interest earning assets

Nominal Interest Rate ( ir)

MD: quantity of money

Lower opportunity cost associated w/ holding money in checking account

Question 6

What happens to the demand of money when there is inflation?

Answer 6

The demand shifts right

Question 7

What are money demand shifters?

Answer 7

1. Changes in price levels
2. Changes in income
3. Changes in technology

Question 8

The transaction demand for money is very closely associated w/ money ‘ s uses as a

(A) store of value
(B) standard unit of account
(C) measure of value
(D) medium of exchange
(E) standard of deferred payment

Answer 8

D