Question 1

The average monthly balance in Aaron's bank account is $2,000.Aaron spends the same amount of money each day during the month,and at the end of the month his account balance is $0.Aaron's monthly starting balance is

Accepted Answer

Since Aaron spends the same amount of money each day during the month, he spends a total of 30 times that amount in one month. Let's call the daily spending amount "x". Therefore, his total spending for the month is 30x.

If we subtract his total spending from his starting balance ($2,000), we get his ending balance of $0. So:

$2,000 - 30x = $0

Solving for "x", we get:

x = $2,000/30 = $66.67

So Aaron spends $66.67 per day.

Now, to find his starting balance, we simply add up all the days of spending to his ending balance.

30 days x $66.67/day = $2,000

Therefore, Aaron's monthly starting balance is $2,000 (choice C).

Question 2

The interest rate paid on bonds increases from 4% to 7%.This will cause

Accepted Answer

As the interest rate paid on bonds increases, the opportunity cost of holding money also increases. Therefore, individuals will want to hold less money and more bonds, causing the optimal balance of money to decrease.

Question 3

The price of bonds and the interest rate are

Accepted Answer

Bonds and interest rates are negatively related. When interest rates increase, the opportunity cost of holding a bond decreases, causing the price of the bond to decrease in order to maintain the same yield. Conversely, when interest rates decrease, the opportunity cost of holding a bond increases, causing the price of the bond to increase to maintain the same yield.

Question 4

A bond with a face value of $1,000

Accepted Answer

The price of a bond is determined by supply and demand in the market, as well as factors such as interest rates and the creditworthiness of the issuer. Therefore, a bond with a face value of $1,000 may sell for more or less than that amount depending on various market factors.

Question 5

Veronica's income is $4,000 a month.She deposits $800 in a saving account,buys $300 worth of government securities,and leaves the rest for daily transactions.Veronica's transaction money demand is

Accepted Answer

Veronica's transaction money demand is the amount she leaves for daily transactions after saving and investing. She saves $800 and invests $300, totaling $1,100. Subtracting this from her $4,000 income leaves $2,900 for transactions.

Question 6

Related to the Economics in Practice on p.526: If the estate in the Chekhov play Uncle Vanya is earning 2 percent,yet a potential buyer wants to earn more than 2 percent,the sales price of the estate would have to

Accepted Answer

If the estate is earning 2 percent, it means that its current value is such that the income generated from it equals 2 percent of its value. If a potential buyer wants to earn more than 2 percent, it means that they would be willing to pay less for the estate. This is because the higher the price paid for the estate, the lower the percentage return the buyer would receive on their investment. Therefore, the sales price of the estate would have to fall in order to satisfy the buyer's demand for a higher return.

Question 7

John's optimal money balance has increased.This could have been caused by

Accepted Answer

An increase in John's optimal money balance implies that he is holding more money than before. This could be because the opportunity cost of holding money has decreased due to a decrease in the interest rate. When interest rates are lower, the return on holding money is relatively higher compared to other investments such as bonds, thereby making holding money more attractive.

Question 8

When the interest rate rises,bond values

Accepted Answer

When the interest rate rises, bond values fall because investors demand higher rates of return to compensate for the higher opportunity cost of tying up their money in a fixed-income investment like a bond. As a result, bond prices decrease to adjust to the higher yield offered by other investments with higher rates of return.

Question 9

Which of the following is NOT a motive for holding money?

Accepted Answer

The asset motive is not a recognized motive for holding money. The main motives are the transaction motive, precautionary motive, and speculative motive.

Question 10

The market-determined prices of existing bonds and interest rates are directly related.

Accepted Answer

The market-determined prices of existing bonds and interest rates are inversely related; as interest rates rise, bond prices typically fall, and vice versa.

Question 11

Related to the Economics in Practice on p.526: If the estate in the Chekhov play Uncle Vanya is earning 2 percent,the interest rate on suitable securities is 5 percent,and the securities are a better risk than the estate,a potential buyer should require the price of the estate be ________ until the equivalent return on the estate is ________.

Accepted Answer

The estate is currently earning 2 percent, but the interest rate on suitable securities is 5 percent. This means that the estate is not earning as much as it could be if it were invested in securities. A potential buyer should therefore require the price of the estate to be lowered until the equivalent return on the estate is greater than 5 percent.

Question 12

An increase in the interest rate will

Accepted Answer

An increase in the interest rate raises the opportunity cost of holding idle money and incentivizes households to hold less money. Therefore, the optimal money balance would decrease.

Question 13

Ed's monthly starting balance is $3,000.Ed spends $100 per day.Initially,Ed keeps all of his income in a non-interest-bearing checking account.Ed decided to change his strategy and at the beginning of each month he deposits one-third of his income into his checking account and buys two bonds with the remainder of his income.After 10 days he cashes in one bond and 10 days after that he cashes in the other bond.Which of the following statements is TRUE?

Accepted Answer

If the interest rate paid on bonds decreases, the opportunity cost of Ed's original strategy (keeping all his income in a non-interest-bearing checking account) decreases. This means that the benefit of the second strategy (depositing one-third of his income into his checking account and buying bonds with the remainder) becomes less significant. Therefore, Ed may be better off continuing with his original strategy. None of the other statements are true or relevant to the given information.

Question 14

The average monthly balance in Tony's bank account is $650.Tony spends the same amount of money each day during the month and at the end of the month his account balance is $0.Tony's monthly starting balance is

Accepted Answer

If Tony spends the same amount of money each day during the month, that means he spends a total of $650 during the month. Therefore, his starting balance must be $1,300 ($650 + $650).

Question 15

Firms and governments can borrow funds by issuing bonds.

Accepted Answer

Firms and governments can issue bonds to borrow funds from investors. The bond represents a loan agreement between the issuer and the investor, and the bondholder receives periodic interest payments until the bond matures and the principal is repaid.

Question 16

When interest rates fall,bond values rise.

Accepted Answer

When interest rates fall, bond prices rise because investors can earn a relatively higher return by holding onto an older bond with a higher interest rate compared to newer bonds with lower interest rates.

Question 17

Mary is paid on the 1st of every month and her rent is due on the 15th of every month.This is an example of the

Accepted Answer

Mary's situation illustrates a nonsynchronization of income and spending, as her income is received at the beginning of the month, while her rent is due halfway through the month. This can lead to cash flow problems and the need for careful money management to ensure that expenses are covered. Financial float refers to the delay between when a payment is made and when it is processed by the recipient's bank, and is not directly relevant to Mary's situation.

Question 18

The average monthly balance in Yolanda's bank account is $1,800.Yolanda spends the same amount of money each day during a 30-day month,and at the end of the month her account balance is $0.Yolanda spends her money at a constant rate of ________ per day.

Accepted Answer

The answer of The average monthly balance in Yolanda's bank...

Question 19

The average monthly balance in Bobby's bank account is $3,000.Bobby spends the same amount of money each day during a 30-day month,and at the end of the month his account balance is $0.Bobby spends his money at a constant rate of ________ per day.

Accepted Answer

Bobby's total spending for the month is $3,000, and since he spends the same amount each day over 30 days, he spends $3,000 / 30 = $100 per day.

Question 20

Lisa's optimal monetary balance has decreased.This could have been caused by

Accepted Answer

A reduction in the costs paid for switching from bonds to money makes it cheaper to hold less money and switch more frequently, thus reducing the optimal monetary balance.

Quiz 11: Money Demand and the Equilibrium Interest Rate