Module 28

How will each of the following affect the opportunity cost or benefit of holding cash? Explain. a. Merchants charge a 1% fee on debit/credit card transactions for purchases of less than $50 b. To attract more deposits, banks raise the interest paid on six-month CDs. c. Real estate prices fall significantly. d. the cost of food rises significantly.

a. a 1% purchase fee on debit/credit card transactions for purchases less than $50 increases the benefit of holding cash because consumers will save money by paying with cash. b. an increase in the interest paid on six-month CDs raises the opportunity cost of holding cash because holding cash requires forgoing the higher interest paid c. a fall in real estate prices has no effect on the opportunity cost or benefit of holding cash because real estate is an illiquid asset and therefore isn't relevant in the decision of how much cash to hold. Also, real estate transactions are generally not carried out using cash. d. because many purchases of food are made in cash, a significant increase in the cost of food increases the benefit of holding cash.

explain how each of the following would affect the quantity of money demanded, and indicate whether each change would cause a movement along the money demand curve or a shift of the money demand curve. a. short-term interest rates rise from 5% to 30% b. all price fall by 10% c. New wireless technology automatically charges supermarket purchase to credit cards, eliminating the need to stop at the cash register. d. in order to avoid paying taxes, a vast underground economy develops in which workers are paid their wages in cash rather than with check.

a. by increasing the opportunity cost of holding money, a high interest rate reduces the quantity of money demanded. This is movement up and to the left along the money demand curve. b. a 10% fall in prices reduces the quantity of money demanded at any given interest rate, shifting the money demand curve leftward. c. this technology change reduces the quantity of money demanded at any given interest rate, so if it shifts the money demand curve leftward. d. payments in cash require employers to hold more money, increasing the quantity of money demanded at any given interest rate. So it shifts the money demand curve rightward.

What will happen to the money supply and the equilibrium interest rate if the Federal Reserve sells Treasury securities? a. money supply:increase - equilibrium interest:increase b.money supply: decrease - equilibrium interest:increase c.money supply:increase - equilibrium interest: decrease d. money supply: decrease - equilibrium interest:decrease e. money supply: decrease - equilibrium interest:no change

b.money supply: decrease - equilibrium interest:increase

A change in which of the following will shift the money demand curve? I. the aggregate price level II. real GDP III. the interest rate a. I only b. II only c. III only d. I and II only e. I, II and III

d. I and II only

Which of the following will decrease the demand for money? a. an increase in the interest rate b. inflation c. an increase in real GDP d. an increase in the availability e. the adoption of Regulation Q

d. an increase in the availability

Which of the following is true regarding short-term and long-term interest rates? a. short-term interest rates are always above long-term interest rates. b. short-term interest rates are always below long-term interest rates. c. short-term interest rates are always equal to long-term interest rates. d. short-term interest rates are more important for determining the demand for money, e. long-term interest rates are more important for determining the demand for money.

d. short-term interest rates are more important for determining the demand for money,

The quantity of money demanded rises (that is, there is a movement along the money demand curve) when a. the aggregate price level increases b. the aggregate price level falls c. real GDP increases d. new technology makes banking easier e. short-term interest rates fall

e. short-term interest rates fall

liquidity preference model of the interest rate

interest rate is determined by the supply and demand for money

long-term interest rate

interest rates on financial assets that mature a number of years in the future

money supply curve

shows how the quantity of money supplied varies with the interest rate

money demand curve

shows the relationship between the quantity of money demanded and the interest rate

short-term interest rate

the interest rate on financial assets that mature within less than a year