Question 1

Which of the following explains why the demand for money depends upon the interest rate?

Accepted Answer

D

Question 2

When does the opportunity cost of holding money increase?

Accepted Answer

The opportunity cost of holding money increases when the interest rate rises because the potential earnings from investing that money at the higher interest rate are forgone.

Question 3

Suppose the interest rate increases.How are opportunity cost of holding money and quantity of money demanded affected?

Accepted Answer

When the interest rate increases, the opportunity cost of holding money increases because the return on holding money is lower compared to the return on holding interest-bearing assets such as bonds or savings accounts. As a result, people would prefer to hold less money and invest more in interest-bearing assets, which leads to a decrease in the quantity of money demanded.

Question 4

What is the advantage of money as a store of value?

Accepted Answer

The answer of What is the advantage of money as...

Question 5

Which of the following will cause the money demand curve to shift?

Accepted Answer

A change in nominal GDP affects the demand for money because it influences the amount of transactions in the economy, thus shifting the money demand curve.

Question 6

Which way does the money demand curve slope?

Accepted Answer

The money demand curve slopes downward because as the interest rate decreases, the opportunity cost of holding money (instead of investing it) decreases, making people more willing to hold money.

Question 7

Money has several roles.Which role is the demand for money based on?

Accepted Answer

The demand for money is primarily based on its role as a medium of exchange, meaning people hold money in order to facilitate transactions and purchases. While money can also function as a store of wealth and a standard of value, these roles are not the primary drivers of demand for money. Money is not typically an interest-bearing asset, as interest-bearing assets such as bonds and savings accounts are substitutes for money rather than part of its function.

Question 8

How does the demand for money vary with price level and real GDP?

Accepted Answer

The demand for money varies directly with the price level because as prices increase, individuals and businesses need more money to handle transactions. Similarly, it varies directly with the level of real GDP because as the economy grows and produces more goods and services, more money is needed to facilitate this increased number of transactions.

Question 9

What is the primary reason for people to own or hold money?

Accepted Answer

The primary reason for people to own or hold money is because it can be used directly to buy goods and services. Money serves as a medium of exchange and facilitates transactions in the economy.

Option A is incorrect because money does not have a guaranteed nominal return. The return on money depends on various factors such as inflation, interest rates, and market conditions.

Option B is incorrect because money does not have a guaranteed real return. In fact, holding money results in a negative real return due to inflation.

Option D is also incorrect because while money functions as a unit of account, it is not the primary reason for people to own or hold money.

Question 10

How is the opportunity cost of holding money measured?

Accepted Answer

The opportunity cost of holding money is measured by the interest rate. When money is held instead of being invested or spent, it loses potential interest or investment earnings. Therefore, the cost of holding money is the foregone interest that could have been earned on an investment or deposit.

Question 11

Why is demand for money relevant in a modern economy?

Accepted Answer

Demand for money is relevant because in modern economies, all accounts must eventually be settled with money. This includes purchases made with cash, demand deposits, and credit cards, all of which count towards the money supply. As individuals and firms engage in economic activity, they will have a demand for money to settle their transactions and pay their bills. This is important for ensuring that the economy runs smoothly and that there is enough liquidity to meet the demands of consumers and businesses.

Question 12

What type of relationship exists between the interest rate and the quantity of money demanded?

Accepted Answer

There exists an inverse relationship between the interest rate and the quantity of money demanded. When the interest rate is high, people tend to save more, and demand for money decreases, thereby decreasing the quantity of money demanded. Conversely, when the interest rate is low, people tend to borrow more, and demand for money increases, thereby increasing the quantity of money demanded. So, as the interest rate increases, the quantity of money demanded decreases, and vice versa.

Question 13

Which of the following is NOT assumed to be constant along the money demand curve?

Accepted Answer

The money demand curve assumes that the price level, real GDP, and nominal GDP are constant, but it does not assume that the interest rate is constant. The interest rate is typically the variable that changes along the money demand curve.

Question 14

What does the money demand curve describe?

Accepted Answer

The money demand curve describes how the quantity of money demanded varies with the interest rate. As the interest rate rises, people and firms demand less money because it becomes more expensive to borrow and hold cash, which does not earn interest. Conversely, as the interest rate falls, people and firms demand more money because it becomes cheaper to borrow and hold cash. The shape of the money demand curve reflects the inverse relationship between the interest rate and the quantity of money demanded.

Question 15

What should an individual compare when deciding how much money to hold?

Accepted Answer

An individual should consider the advantage of liquidity (being able to access funds easily) with the disadvantage of losing interest by not holding enough money. Holding too much money can also have a disadvantage of not earning enough interest. Therefore, finding the balance between liquidity and interest earning potential is important when deciding how much money to hold.

Question 16

If the interest rate rises, how does this affect how much money people hold?

Accepted Answer

When the interest rate rises, the opportunity cost of holding money increases. This means that people can earn more by investing the money rather than holding it, so they will hold less money.

Question 17

How is the money demand curve affected when price level increases?

Accepted Answer

When the price level increases, people need more money to buy the same amount of goods and services, leading to a rightward shift in the money demand curve.

Question 18

How will a decrease in the interest rate affect the quantity of money people want to hold?

Accepted Answer

When interest rates decrease, the opportunity cost of holding money (instead of investing it) decreases, making people more willing to hold larger quantities of money for transactions or precautionary reasons.

Question 19

When the demand for money is shown on a graph, which variable is on the vertical axis and which variable is on the horizontal axis?

Accepted Answer

The demand for money is typically shown as a downward-sloping curve, with the interest rate on the vertical axis and the quantity of money on the horizontal axis. This reflects the inverse relationship between the quantity of money demanded and the interest rate: as interest rates rise, people are more likely to hold onto their money (i.e. demand for money increases), while as interest rates fall, people are more likely to spend or invest their money (i.e. demand for money decreases).

Question 20

What is the opportunity cost of holding money rather than some other financial asset?

Accepted Answer

The opportunity cost of holding money is the forgone interest income that could have been earned if the money had been invested in some other financial asset. Holding money does not generate any interest income, so the opportunity to earn a return on the money is lost.

Quiz 15: Monetary Theory and Policy in an Open Economy