I was wondering if anyone could help me with these questions. I\'m having a diff

Question

I was wondering if anyone could help me with these questions. I'm having a difficult time with them. Thank you

1. Which of the following is an example of the asset demand for money?

a. Marianne uses money in her checking account to buy groceries every week

b. Since the stock market has been volatile lately, Jean holds most of her savings in a bank accont.

c. Joan believes gold is an excellent store of value

d. Carla keeps $2,000 in a bank account in case of emergencies.

2. Which of the following events would be likely to decrease the supply of money?

a. The Fed decreases reserve requirements for banks?

b. The Fed conducts an open market purchase of bonds.

c. Bank perceive loans to be less risky and are willing to hold fewer excess reserves.

d. The Fed increases the discount rate relative to the federal funds rate.

3. Suppose that initially the money supply is $3 trillion, the price level equals 3, the real GDP is $5 trillion in base-year dollars and income velocity of money is 5.

Then suppose that the quantity of money in circulation remain fixed but the income velocity of money doubles.

If real GDP remains at its long-run potential level, calculate the equilibrium price level.

4. Consider the following data. The money supply is $3 trillion, the price level equals 4, the real GDP is $4 trillion in base-year dollars.

Calculate the income velocity of money.

5. Suppose that currently, the economy is overutilizing its resources.is overutilizing its resources.

Which of the following correctly describes what type of monetary policy the Fed might choose and how the policy would change the economy?

a.The Fed could use a contractionary monetary policy to reduce short - run aggregate supply and GDP.

b. The Fed could use an contactionary monetary policy to reduce aggregate demand and GDP.

c. The Fed could use an expansionary monetary policy to increase aggregate demand and GDP.

d. The Fed could use an expansionary monetary policy to increase short run aggregate supply and GDP.

6. Suppose that the Fed judges inflation to be the most significant problem in the economy and that it wishes to employ all three of its policy instruments, then the Fed will engage in

a. open market sales, decreasing the reserve requirement, and increasing the discount rate.

b. open market purchase, increasing the reserve requirement, and increasing the discount rate.

c. open market purchase, increasing the reserve requirement, and decreasing the discount rate.

d. open market sales, increasing the reserve requirement, and increasing the discount rate.

7. In the money supply affect the economy indirectly because

a. Interest rates increase causing planned investment to decrease, which causes a decrease in aggregate demand.

b. people have insufficient money balances, and thus, aggregate deman decreases.

c. People spend excess money balances and thus aggregate demand increases.

d. Interest rates decrease, causing planned investment to increase, which causes an increase in aggregate demand.

e. There is no indirect effect of the money supply on the economy.

8. Let's denote the price of a nonmaturing bond (called a consol) as Pb. The equation that indicates this price is Pb=1/r, where I is the annual net income the bond generates and r is the nominal market interest rate.

a. Suppose that a bond promises the holder $200 per year forever. The nominal market interest rate is 4 percent. Calculate the bond's current price. (Round your answer to the nearest whole dollar.)

Explanation / Answer

1. Option B is correct.

Demand for money that arises to cater the demand for financial assets is knwon as asset demand, this is inversely related to the interest rates.

2. Option D is correct.

When the discount rate is higher, the cost of borrowing money increases and less loans would be demanded reducing the supply of money.

3. MV = PY.

M = money supply

V = velocity

P = price

Y = real GDP

5*3 = 5*3

Now if V doubles = 10.

M and Y remains same, then

P = MV/Y

P = 10*3/5

P = $6.

4. V = PY/M

V = 4*4/3 = 5.33

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