Question 1

Suppose the money demand function is given by $$ M^d = 0.25Y - 10,000i $$, where $$ Y  is $$yearly income and $$ i  is $$the interest rate. If a person's yearly income increases from $$40,000 to 50$$,000$ while the interest rate remains at 5%, what is the change in money demand?

Accepted Answer

$$2,500$$

Question 2

If the interest rate increases from 4% to 6%, and the money demand function is $$ M^d = 0.3Y - 8,000i $$ with $$ Y = 60,000 $$, what is the change in money demand?

Accepted Answer

$$-16,000$$

Question 3

Which of the following best describes the effect of an increase in the interest rate on the demand for money, holding income constant?

Accepted Answer

The demand for money decreases because the opportunity cost of holding money increases.

Question 4

Suppose the central bank wants to increase the money supply. Which of the following actions would achieve this goal?

Accepted Answer

Purchasing government bonds in the open market.

Question 5

If the money demand function is $$ M^d = 0.2Y - 5,000i $$ and the central bank sets the money supply at $$10,000$$, what is the equilibrium interest rate when $$ Y = 60,000 $$?

Accepted Answer

$$i = 2\%$$

Question 6

Which of the following is a stock variable?

Accepted Answer

Financial wealth

Question 7

If the central bank increases the interest rate, what is the likely effect on bond prices?

Accepted Answer

Bond prices will decrease.

Question 8

Suppose the money demand function is $$ M^d = 0.3Y - 12,000i $$ and the interest rate is 3%. If income increases by $$10,000$$, by how much does money demand change?

Accepted Answer

$$3,000$$

Question 9

Which of the following best describes the relationship between the interest rate and the opportunity cost of holding money?

Accepted Answer

As the interest rate increases, the opportunity cost of holding money increases.

Question 10

If the central bank wants to decrease the money supply, which of the following actions should it take?

Accepted Answer

Sell government bonds in the open market.

Question 11

Suppose the money demand function is $$ M^d = 0.25Y - 10,000i $$ and the central bank increases the money supply. What is the likely effect on the equilibrium interest rate, holding income constant?

Accepted Answer

The equilibrium interest rate will decrease.

Question 12

Which of the following is an example of an open market operation?

Accepted Answer

The central bank buys government securities from commercial banks.

Question 13

If the demand for money is given by $$ M^d = 0.2Y - 4,000i $$ and the interest rate increases from 2% to 4%, what is the change in money demand if $$ Y = 50,000 $$?

Accepted Answer

$$-8,000$$

Question 14

Which of the following statements about the money market is correct?

Accepted Answer

An increase in income shifts the money demand curve to the right.

Question 15

Suppose the central bank wants to keep the interest rate constant despite an increase in income. What should it do?

Accepted Answer

Increase the money supply.

Question 16

If the money demand function is $$ M^d = 0.3Y - 6,000i $$ and the central bank wants to maintain an interest rate of 4% when $$ Y = 80,000 $$, what should the money supply be?

Accepted Answer

$$16,000$$

Question 17

Which of the following is a flow variable?

Accepted Answer

Income

Question 18

If the central bank decreases the required reserve ratio, what is the likely effect on the money supply?

Accepted Answer

The money supply will increase.

Question 19

Suppose the money demand function is $$ M^d = 0.2Y - 5,000i $$ and the central bank increases the money supply from $$10,000 to$$ $$12,000$$ while $$ Y = 50,000 . $$What happens to the equilibrium interest rate?

Accepted Answer

It decreases by 0.4 percentage points.

Question 20

Which of the following best describes the effect of an increase in wealth on the demand for bonds?

Accepted Answer

The demand for bonds increases.

Money Demand, Money Supply, and the Financial System: Macroeconomics Study Notes

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