Which of the following factors would increase the portfolio demand for money? Op

Question

Which of the following factors would increase the portfolio demand for money?

Option a: A financial crisis is looming

Option b: A new Web site allows you to liquidate your stock holdings quickly and cheaply

Option c: You expect future interest rates to rise
revised jrl 07-26-2011

A. Only option b will increase the portfolio demand for money as it will increase the relative liquidity of alternative assets.

B. Both options a and c would increase the portfolio demand for money. If future interest rates are expected to rise, bond prices will fall, making money relatively more attractive. The prospect of a financial crisis will increase the relative riskiness of alternative assets, thus increasing the portfolio demand for money.

C. Both options a and b would increase the portfolio demand for money. The new Web site will increase the relative liquidity of alternative assets, while the prospect of a financial crisis will increase the relative riskiness of alternative assets. Both these factors will increase the portfolio demand for money.

D. Only option c will increase the portfolio demand for money as interest rates are the only factor to consider when allocating resources among different assets.

Explanation / Answer

B. Both options a and c would increase the portfolio demand for money. If future interest rates are expected to rise, bond prices will fall, making money relatively more attractive. The prospect of a financial crisis will increase the relative riskiness of alternative assets, thus increasing the portfolio demand for money.

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