Question 1

Assume that Joe chooses to deposit half his paycheck of $1200 and invests the remaining $600 in an interst-bearing account and runs his balance down evenly throughout the course of the month. Show with the use of a graph what his average monthly holdings would look like.

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Question 2

Draw the demand and the supply for money and identify the equilibrium interest rate. Make sure to draw a money supply curve that is independent of the interest rate. Draw the curves so that the equilibrium interest rate is 8%. Explain why interest rates above or below 8% are not stable.

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Question 3

Explain all of the determinants of money demand. Also include a brief explanation of how a change in each of these determinants would cause a reduction in money demand.

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Question 4

Draw a demand curve for money. Explain the two factors that could cause an increase in the demand for money.

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Question 5

Related to the Economics in Practice on p. 209 [521]: What were the two conclusions of the study concerning ATMs, interest rates, and money holdings?

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Question 6

Explain how people will switch between bonds and money if the interest rate is initially above the market-clearing level. Explain your answer in terms of opportunity costs.

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Question 7

Explain the transaction and speculation motives for holding money.

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Question 8

Explain what is meant by the "speculation motive" for holding money.

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Question 9

Assume that Joe chooses to deposit his entire paycheck of $1200 and runs his balance down evenly throughout the course of the month. Show with the use of a graph what his average monthly holdings would look like.

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Question 10

Explain the trade-off between holding bonds and holding money. Why don't people keep all their assets in the forms that are the easiest to use for making transactions?

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Question 11

Mary earns a monthly income of $3,000. She spends the entire amount each month at the rate of $100 a day. (Assume there are 30 days in the month.) The interest rate paid on bonds is 5% per month. It costs $10 every time Mary sells a bond.
(a) Describe briefly how Mary should go about deciding how much money to hold.
(b) Mary can switch from bonds to cash up to a maximum of three times. How many times should Mary switch from bonds to cash?
(c) What is Mary's optimal balance?

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Question 12

Explain how people will switch between bonds and money if the interest rate is initially below the market-clearing level. Explain your answer in terms of opportunity costs.

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Question 13

In simple terms how is the interest rate determined in the economy and explain why?

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Question 14

What is meant by the term "excess demand for money?" How does the money market resolve this disequilibrium?

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Question 15

Explain what demands make up the total demand for money.

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Question 16

Show on a graph what the effect on the demand for money would be after an increase in income.

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Question 17

Label each of the following events as either leading to an increase or a decrease in the equilibrium interest rate?

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Question 18

-Using the graph above, answer the following questions.
a. Which interest rate would result in an excess demand for money? What would eventually happen to the interest rate?
b. Which interest rate would result in an excess supply for money? What would eventually happen to the interest rate?

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-Using the graph above, answer the following...

Question 19

Why is the money supply curve discussed in the book a vertical line?

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Question 20

What is meant by the term "excess supply of money?" How does the money market resolve this disequilibrium?

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