(a) State whether you agree or disagree with the following statement Explain wha

Question

(a) State whether you agree or disagree with the following statement

Explain what happens to (ii) MS and (iii) interest rates

When the real economy expands (Y rises), the demand for money expands. As a result, households hold more cash and the supply of money expands.

TO ANSWER QUESTIONS

CHOOSE ONLY THREE ANSWERS FROM THE LIST BELOW

Select one or more:

(i) Agree

(i) Disagree

(ii) MS increases

(ii) MS decreases

(ii) MS unchanged

(iii) interest rate increases

(iii) interest rate decreases

(iii) interest rate unchanged

(b) State whether you agree or disagree with the following statement

Explain what happens to (ii) interest rates and (iii) MD

Inflation, a rise in the price level, causes the demand for money to decline. Because inflation causes money to be worth less households desire to hold less of it.

TO ANSWER QUESTIONS

CHOOSE ONLY THREE ANSWERS FROM THE LIST BELOW

Select one or more:

(i) Agree

(i) Disagree

(ii) interest rate increases

(ii) interest rate decreases

(ii) interest rate unchanged

(iii) MD increases

(iii) MD decreases

(iii) MD unchanged

(c) State whether you agree or disagree with the following statement

Explain what happens to (ii) MS, (iii) interest rates and (iv) MD

If the central bank buys bonds in the open market interest rates will no doubt rise.

TO ANSWER QUESTIONS

CHOOSE ONLY FOUR ANSWERS FROM THE LIST BELOW

Select one or more:

(i) Agree

(i) Disagree

(ii) MS increases

(ii) MS decreases

(ii) MS unchanged

(iii) interest rate increases

(iii) interest rate decreases

(iii) interest rate unchanged

(iv) MD increases

(iv) MD decreases

(iv) MD unchanged

Explanation / Answer

a. The increase in Y will increase the demand for money not the money supply. Given the fixed money supply Only interest rate will increase to maintain the balance in the money market.(Disagree)

b. A rise in the price level will lead to fall in the real money supply as a result interest rate will increase. Given the increase in interest rate demand for bonds will increase and that of money will fall.(Agree)

c. The buying of bonds will increase the money supply. This will lead to fall in interest rate. As a result demand for bonds will decrease and that of money will increase.(Disagree)

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