Question 1

If most of the public does not borrow money at the prime rate then why should they even have any interest in worrying about that interest rate?

Accepted Answer

Since many other interest rates like home loans and even credit cards are tied to the prime rate, it is vitally important that people keep abreast of the direction and movement of the prime rate.

Question 2

Assume that Sally has a chance to purchase a magazine subscription for $240 for a year or choose to be billed on a monthly basis for $21. Why might choosing the $240 option not be the rational choice even though it appears to be $12 cheaper?

Accepted Answer

If the interest forgeone during the course of the year on the $240 is greater than the $12 Sally is "saving" by paying the lump sum then that would not be the rational decision.

Question 3

Explain what is meant by an "easy monetary policy?"

Accepted Answer

It represents any set of policies that expand the money supply in an effort to stimulate the economy.

Question 4

Related to the Economics in Practice on p. 209 [521]: What were the two conclusions of the study concerning ATMs, interest rates, and money holdings?

Accepted Answer

The amount of cash divided by total cons

Question 5

What is meant by the term "excess supply of money?" How does the money market resolve this disequilibrium?

Accepted Answer

An excess supply of money means that at

Question 6

If people expect that the Federal Reserve is going to embark on an "easy money" policy which direction will they anticipate interest rates to move and why?"

Accepted Answer

An "easy money" policy would imply that

Question 7

What is the federal funds rate?

Accepted Answer

If one bank has excess reserve

Question 8

Suppose that you own a $1000 bond which earns 20% interest. Now assume that interest rates on newly issued bonds fall to 10%. How much could you reasonably expect to receive for your bond if you were to sell it?

Accepted Answer

Since I would be earning $200 a year in

Question 9

Illustrate with the use of a graph what would happen to the demand for money as output in the economy expands.

Accepted Answer

@#IMG-DLM&
The deman

Question 10

How do corporate bonds differ from corporate paper?

Accepted Answer

Bonds differ from co

Question 11

Which company would you expect to have a higher corporate bond rating, a small start up high tech company with high profits or a well-established company with smaller profits?

Accepted Answer

The bond rating would probably be higher

Question 12

-Using the graph above what would happen to the interest rate if the money supply increased.

Accepted Answer

If the money supply increased

Question 13

What is the nonsynchronization of income and spending?

Accepted Answer

The nonsynchronization of income and spe

Question 14

Why don't people simply keep all of their assets in forms that are easiest to use for making transactions?

Accepted Answer

If people kept all of their assets in fo

Question 15

-Using the graph above what would happen to the interest rate if the money supply decreased.

Accepted Answer

If the money supply decreased

Question 16

What is a Treasury bill?

Accepted Answer

A Treasury bill is a

Question 17

Draw a graph of a money demand curve and a money supply curve. On the graph, indicate the equilibrium interest rate. Also indicate the new equilibrium interest rate if the Fed increases the money supply.

Accepted Answer

If the Fed increases

Question 18

Explain how people will switch between bonds and money if the interest rate is initially above the market-clearing level. Explain your answer in terms of opportunity costs.

Accepted Answer

If the interest rate is above the market

Question 19

Explain with the use of a graph why the shape of the money demand curve makes a difference in terms of the effectiveness of monetary policy. (Hint: draw one money demand curve very steep and another very flat)

Accepted Answer

@#IMG-DLM&
Given an expansion in the supply of mon

Question 20

What do economists mean when they say that bond prices and interest rates are really "two sides of the same coin?"

Accepted Answer

What it means is that when the bond mark

Exam 11: Money Demand and the Equilibrium Interest Rate

If most of the public does not borrow money at the prime rate then why should they even have any interest in worrying about that interest rate?

Assume that Sally has a chance to purchase a magazine subscription for $240 for a year or choose to be billed on a monthly basis for $21. Why might choosing the $240 option not be the rational choice even though it appears to be $12 cheaper?

Explain what is meant by an "easy monetary policy?"

Related to the Economics in Practice on p. 209 [521]: What were the two conclusions of the study concerning ATMs, interest rates, and money holdings?

What is meant by the term "excess supply of money?" How does the money market resolve this disequilibrium?

If people expect that the Federal Reserve is going to embark on an "easy money" policy which direction will they anticipate interest rates to move and why?"

What is the federal funds rate?

Suppose that you own a $1000 bond which earns 20% interest. Now assume that interest rates on newly issued bonds fall to 10%. How much could you reasonably expect to receive for your bond if you were to sell it?

Illustrate with the use of a graph what would happen to the demand for money as output in the economy expands.

How do corporate bonds differ from corporate paper?

Which company would you expect to have a higher corporate bond rating, a small start up high tech company with high profits or a well-established company with smaller profits?

-Using the graph above what would happen to the interest rate if the money supply increased.

What is the nonsynchronization of income and spending?

Why don't people simply keep all of their assets in forms that are easiest to use for making transactions?

-Using the graph above what would happen to the interest rate if the money supply decreased.

What is a Treasury bill?

Draw a graph of a money demand curve and a money supply curve. On the graph, indicate the equilibrium interest rate. Also indicate the new equilibrium interest rate if the Fed increases the money supply.

Explain how people will switch between bonds and money if the interest rate is initially above the market-clearing level. Explain your answer in terms of opportunity costs.

Explain with the use of a graph why the shape of the money demand curve makes a difference in terms of the effectiveness of monetary policy. (Hint: draw one money demand curve very steep and another very flat)

What do economists mean when they say that bond prices and interest rates are really "two sides of the same coin?"

The Scope and Method of Economics

The Economic Problem: Scarcity and Choice

Demand, Supply, and Market Equilibrium

Demand and Supply Applications

Introduction to Macroeconomics

Measuring National Output and National Income

Unemployment, Inflation, and Long-Run Growth

Aggregate Expenditure and Equilibrium Output

The Government and Fiscal Policy

The Money Supply and the Federal Reserve System

The Determination of Aggregate Output, the Price Level, and the Interest Rate

Policy Effects and Costs Shocks in the Asad Model

The Labor Market in the Macroeconomy

Financial Crises, Stabilization, and Deficits

Household and Firm Behavior in the Macroeconomy: a Further Look

Long-Run Growth

Alternative Views in Macroeconomics

International Trade, Comparative Advantage, and Protectionism

Open-Economy Macroeconomics: the Balance of Payments and Exchange Rates

Economic Growth in Developing and Transitional Economies

Filters