Scenario 1
Consider two money management strategies. The first strategy is called the cash strategy in which an individual deposits her monthly earnings in a checking account and draws down equal amounts each day to finance her daily expenditures. Assume that she earns no interest on her checking accounts and funds are exhausted at the end of the month. The second strategy is called the bond fund strategy. Here the individual deposits one-quarter of her earnings in a checking account and the remaining three-quarters in a bond fund. The bond fund pays 1% interest per month. At the end of the week when the money in the checking account is exhausted, the individual replenishes it by withdrawing another one-quarter of her earnings from the bond fund for the next week. This process is repeated at the end of the second week and third week until the bond fund is exhausted.
-Refer to Scenario 1. In which strategy will the quantity of money demanded be greater?

Question

Quizplus · Accepted Answer

In the cash strategy, the entire monthly earnings are held as money in a checking account, leading to a higher quantity of money demanded compared to the bond fund strategy, where only a portion is kept as money while the rest is invested in bonds.

Scenario 1 Consider Two Money Management Strategies. the First Strategy Is Called