Question 1

Explain the speculative motive for holding money.

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Question 2

Explain how the demand for money might change even if interest rates remain unchanged.

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Question 3

What do economists mean when they say that bond prices and interest rates are really "two sides of the same coin?"

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Question 4

Assume that the current interest rate is 9% . Assume that investors know that normally interest rates are 7%. How would this affect investors' decisions with regard to how much money and bold holdings to keep?

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Question 5

What is the nonsynchronization of income and spending?

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Question 6

Explain why money demand is not a flow measure.

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Question 7

Suppose that you own a $1000 bond which earns 5% interest. Furthermore, assume that interest rates on newly issued bonds rise to 10%. Explain why no one would be willing to buy your bond for a $1000. In addition, calculate the price that you could reasonably expect to receive for your bond.

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Question 8

Critically evaluate the following statement. "Higher bond prices are what causes lower interest rates."

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Question 9

Assume that the current interest rate is 8%. Let's say that investors know that normally interest rates are 10%. How would this affect investors' decisions with regard to how much money and bond holdings to keep?

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Question 10

What is the federal funds rate? What is the commercial paper rate? What is the prime rate of interest?

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Question 11

Why are money demand and saving not really the same thing for the household?

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Question 12

Summarize the determinants of the demand for money.
(a) aggregate output
(b) the prices of goods and services

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Question 13

Why don't people simply keep all of their assets in forms that are easiest to use for making transactions?

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Question 14

What is the relationship between interest rates or yields on bonds and their price or market value?

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Question 15

If interest rates are currently at zero percent how might this inhibit the ability of the Feederal Reserve to conduct monetary policy to stimulate investment?

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Question 16

Explain the demand for money in relation to interest rates.

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Question 17

Explain how and why the demand for money might change even if the number of transactions in the economy does not.

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Question 18

Keynes argued that people hold money for speculative reason. He stressed the choice between money and bonds. If agents expect the future nominal interest rate (the return on bonds) to be lower than the current rate they will then reduce their holdings of money and increase their holdings of bonds. If the future interest rate does fall, then the price of bonds will increase and the agents will have realized a capital gain on the bonds they purchased. This means that the demand for money in any period will depend on both the current nominal interest rate and the expected future interest rate. What implications does this have with respect to the volatility of money?

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Question 19

By the middle of 2008 the Fed had driven the short-term interest rate close to zero, and it remained at essentially zero through the middle of 2010. How do you think this affected people's decision of whether to hold on to money or hold bonds instead?

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Question 20

Suppose that you own a $1000 bond which earns 20% interest. Now assume that interest rates on newly issued bonds fall to 10%. How much could you reasonably expect to receive for your bond if you were to sell it?

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