Question 1 In the economy there is $150 in cash and $225 in travelers checks. Th

Question

Question 1

In the economy there is $150 in cash and $225 in travelers checks. The amount of M1 in this economy is $ ____ and the amount of M2 is $ ____ .

Question 2

Suppose there is a decrease in the liquidity of bonds. Consequently, in the market for bonds, we would expect that the _____ for bonds will _____ .

Question 3

If firms in the economy find that there are less profitable business opportunities, then in the bond market, the equilibrium price will ____ and the equilibrium interest rate will ____ .

Question 4

Suppose that in the bond market, there is an increase in the expected return on bonds for investors, and a decrease in the government's budget deficit. Then the result of these two changes will what effect on the equilibrium price?

Question 5

In the market for bonds, the liquidy levels increase and firms' profitable business opportunities contract in the economy. Then in this market, the equilibrium interest rate for bonds

Explanation / Answer

1) 375,375

M1 = currency + checkable deposits including traveller's cheque

M2 = M1 + saving deposits

M1= 150+225= 375

M2= 375

2) demand, decrease

Low liquidity of bonds reduces its demand because it cannot be converted into money easily.

3) rise, fall

Demand for bonds will rise as people would hold less money if there is not much profitable investments. Increase in demand leads to increase in price of bonds. This simultaneously reduces investment which leads to decrease in interest rate.

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