First, explain why the money demand curve is downward sloping. Second, explain what factor(s) will cause shifts in the money demand curve
What will be an ideal response?
The money demand curve is downward sloping (with the interest rate on the vertical axis). It is assumed that money pays no interest. At the same time, individuals earn interest when they hold bonds. So, as the interest rate increases, individuals are more willing to incur the costs associated with converting bonds to money when they wish to buy goods. So, an increase in the interest rate causes a reduction in money demand. Money demand depends on the level of transactions and on the interest rate. As the level of transactions increases, individuals will increase money demand. Assuming that nominal income is correlated with nominal transactions, an increase in nominal income will cause an increase in money demand and shifts in the curve.
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Which of the following will cause the LM curve to shift up?
A) an increase in the expected future interest rate B) an increase in current income C) an increase in expected future taxes D) all of the above E) none of the above
During the Christmas holiday season, the Fed increases the supply of currency to:
a. ensure that checks are cleared quickly. b. meet the demand for cash withdrawals from banks. c. stabilize the value of the dollar against other currencies. d. decrease the value of bonds. e. control inflation.