Question 1

One of the debatable assumptions on which the ATM model for the demand for cash is based on is that

Accepted Answer

The ATM model for the demand for cash assumes that individuals spend the same amount of money every day, which is a simplification of real-world spending behavior where expenditures can fluctuate daily.

Question 2

How much is someone who visits the ATM once every 7 days and has an average cash balance of $70 expected to spend daily?

Accepted Answer

D

Question 3

What is the average cash holdings of someone who visits the ATM once every 8 days and spends $25 on a daily basis?

Accepted Answer

If someone spends $25 every day, they will spend $200 in 8 days. Therefore, to maintain an average cash balance, they should have $100 in cash holdings. So, answer (C) $100 is the best choice.

Question 4

In the ATM model, if the nominal interest rate declines, then the

Accepted Answer

When the nominal interest rate declines, the opportunity cost of holding money decreases, leading people to hold more money and visit the ATM less frequently, increasing the number of days between visits.

Question 5

In the ATM model, if the cost of going to an ATM increases,

Accepted Answer

The answer of In the ATM model, if the cost...

Question 6

In the ATM model, if the probability of loss or theft decreases, then

Accepted Answer

The answer of In the ATM model, if the probability...

Question 7

In the ATM model, the demand for money depends on

Accepted Answer

The ATM model of money demand includes factors like the nominal interest rate, costs associated with obtaining cash (such as ATM fees or the time spent going to the bank), the risk of losing money or having it stolen, and the total amount of spending a person plans to do. These factors influence how much cash individuals choose to hold.

Question 8

The cost of going to an ATM is $2 in an economy.If the nominal interest rate in the economy is 1 percent, what is the total cost associated with holding cash for an individual who spends $15 daily and has a 9 percent probability of having his cash lost or stolen? Assume that he visits the ATM once in every T days.

Accepted Answer

The total cost consists of the ATM fee cost and the cost of holding cash. The ATM fee cost is $2 every T days, which annualizes to 365/T * $2 = 730/T. The cost of holding cash includes the interest foregone and the risk of loss or theft. Daily spending is $15, so the average cash holding is $15*T/2 (since cash decreases linearly from $15T to $0 over T days). The interest foregone is 1% of this amount annually, or 0.01 * $15*T/2 = $0.15T/2 = $0.075T. The risk of loss or theft is 9% of the average cash holding, or 0.09 * $15*T/2 = $0.675T. The total cost of holding cash is thus $0.075T + $0.675T = $0.75T. Therefore, the total cost is (730/T) + (0.75 × T).

Question 9

If the cost of going to the ATM is $2 and the nominal interest rate is 1 percent, someone who has a 9 percent probability of having his cash lost or stolen and spends $15 each day will go to the ATM once in every ____ days approximately.

Accepted Answer

First, we need to calculate the expected cost of going to the ATM in one day:
Expected cost = probability of loss/theft * cost of cash + cost of ATM fee
Expected cost = 0.09 * $15 + $2
Expected cost = $3.35

Next, we need to calculate how many days it will take for the nominal interest earned (1%) to offset the expected cost of going to the ATM each day ($3.35) using the formula:
Years to break even = ln(expected cost per day / interest earned per day) / ln(1 + interest rate)

Days to break even = (ln(expected cost per day / interest earned per day) / ln(1 + interest rate)) * 365

Days to break even = (ln($3.35 / ($15 * 0.01)) / ln(1 + 0.01)) * 365
Days to break even ≈ 31
Therefore, someone who has a 9 percent probability of having his cash lost or stolen and spends $15 each day will go to the ATM once in every approximately 31 days to break even on the expected cost of going to the ATM each day with the nominal interest earned. Choice B is the best choice, which shows the closest value to 31.

Question 10

Someone who has an average cash balance of $45 and spends $15 per day will visit the ATM once in every days.

Accepted Answer

The answer of Someone who has an average cash balance...

Question 11

A variable that is determined outside a model is called a(n)

Accepted Answer

An exogenous variable is a variable that is determined outside of the model and whose value is imposed on the model. This is in contrast to an endogenous variable, which is determined within the model based on its relationships with other variables. Therefore, choice D is the correct answer.

Question 12

The nominal interest rate in an economy is 5 percent, and there is also a 15 percent probability of having cash lost or stolen in the economy.Given this information, what is the cost of going to the ATM for an individual who spends $10 daily and has a total cost of holding cash = (365/T) + T.Assume that the individual visits the ATM once in every T days.

Accepted Answer

The cost of going to the ATM is the sum of the cost of holding cash and the probability of losing cash. The cost of holding cash is (365/T) + T, and the probability of losing cash is 15%. So, the cost of going to the ATM is (365/T) + T + 0.15 * 10 = (365/T) + T + 1.5. To minimize this cost, we need to find the value of T that minimizes (365/T) + T + 1.5. Taking the derivative of this expression with respect to T and setting it equal to zero, we get:-365/T^2 + 1 = 0-365 + T^2 = 0T^2 = 365T = sqrt(365) = 19.11So, the individual should visit the ATM once every 19.11 days to minimize the cost of going to the ATM. The cost of going to the ATM is then:(365/19.11) + 19.11 + 1.5 = $20.00

Question 13

If the cost of going to the ATM in an economy is $1 and the nominal interest rate is 5 percent, someone who spends $10 each day and has the total cost of holding cash = (365/T) + T, has a _____stolen.Assume that the individual visits the ATM once in every T days.

Accepted Answer

The answer of If the cost of going to the...

Question 14

A variable that is determined within a model is called

Accepted Answer

An endogenous variable is a variable that is determined within a model, as opposed to an exogenous variable, which is determined outside of the model. A dynamic variable refers to a variable that changes over time, while a static variable refers to a variable that does not change over time. Therefore, option C is the best choice for this question.

Question 15

If the nominal interest rate is 3 percent and the cost of going to the ATM is $1.50, someone who has a 12 percent probability of having his cash lost or stolen and has a total cost of holding cash equal to (547.50/T) + (0.375 × T) spends _____daily.Assume that the individual visits the ATM once in every T days.

Accepted Answer

The answer of If the nominal interest rate is 3...

Question 16

The cost of going to an ATM is $1 in an economy.If the nominal interest rate in the economy is 5 percent, what is the total cost associated with holding cash for an individual who spends $10 daily and has a 15 percent probability of having his cash lost or stolen? Assume that he visits the ATM once in every T days.

Accepted Answer

The answer of The cost of going to an ATM...

Question 17

An individual spends $5 daily and also spends an additional $1.50 each time he goes to an ATM.There is also a 12 percent risk of having his cash lost or stolen.If his total cost of holding cash is (547.50/T) + (0.375 × T), then what is the ongoing nominal interest rate in the economy? Assume that the individual visits the ATM once in every T days.

Accepted Answer

First, we need to calculate the total cost of holding cash over a year:

Daily cost = $5 + $1.50 = $6.50
Annual cost = $6.50 * 365 = $2,372.50

Now, we need to take into account the 12% risk of loss or theft:

Effective annual cost = $2,372.50 * (1 + 0.12) = $2,657.00

Finally, we can use this equation to solve for the nominal interest rate (r):

Effective Annual Interest Rate = (1 + r/n)^n - 1

where n is the number of times interest is compounded per year. Since we visit the ATM once in every T days, the number of times interest is compounded per year is:

n = 365/T

Plugging in the values, we get:

(1 + r/(365/T))^(365/T) - 1 = $2,657.00/$547.50

Solving for r using trial and error, we get:

r = 0.03 or 3%

Therefore, the answer is C) 3 percent.

Question 18

​In the ATM model of money, the opportunity cost of holding money is determined by

Accepted Answer

In the ATM model of money, the opportunity cost of holding money is determined by the nominal interest rate because money held in cash is not earning interest. Additionally, there is a possibility of having the cash stolen, which also affects the opportunity cost of holding money. Inflation, cost of going to an ATM, and charges levied on every ATM transaction are all factors that affect the demand for money, but they do not directly determine the opportunity cost of holding money.

Question 19

In the ATM model of the demand for cash, if a person's daily amount of spending increases, then

Accepted Answer

According to the ATM model of the demand for cash, if a person's daily amount of spending increases, then they will require more cash, and therefore the quantity of money demanded will rise. Additionally, if they are spending more money per day, then they will need to visit the ATM more often to withdraw cash. Therefore, the number of days between visits to the ATM falls.

Question 20

If the cost of going to the ATM is $1 and the nominal interest rate is 5 percent, someone who has a 15 percent probability of having his cash lost or stolen and spends $10 each day will go to the ATM once in every ____ days approximately.

Accepted Answer

The expected loss from theft or loss is 15% of $10, which is $1.50 per day. Adding the ATM cost of $1, the total cost per day is $2.50. With a 5% nominal interest rate, the daily interest rate is approximately 0.05/365 = 0.000137. To find the number of days (n) that minimizes the total cost, we equate the daily cost to the interest cost of holding cash: $2.50 = $10 * n * 0.000137. Solving for n gives approximately 19 days.

Quiz 11: Modeling Money