Question

1.)

Using the above figure, if the price level increases

	the equilibrum interest rate rises and the equilibrium quantity of money rises
	the equilibrium interest rate rises and the equilibrium quantity of money falls
	the equilibrium interest rate rises and the equilibrium quantity of money stays the same
	the equilibrium interest rate falls and the equilibrium quantity of money falls
	the equilibrium interest rate falls and the equilibrium quantity of money stays the same

2.)

The demand for money is downward sloping because

	a lower interest rate raises the opportunity cost of holding cash
	it is set that way by the Federal Reserve
	a higher interest rate raises the opportunity cost of holding cash
	none of the above is correct

3.)

What trade-off must be considered when deciding how much of your wealth is to be held as money relative to bonds?

	bonds pay more interest and are easier to use for payment
	bonds pay less interest but are less convenient relative to money
	bonds pay more interest but are less convenient relative to money
	money pays less interest and is less convenient to use
	money pays more interest and is less convenient to use

Answer 1

1). The price level and the demand for the money is directly related , that is if the price level increases people will need more money to do the day to day transactions(when the price level rises the value of money has decreased), so the demand for the money increases. In this case the money demand curve will shift outwards and as a result the equilibrium interest rate will increase and the quantity of money will remain the same.

Ans: The equilibrium interest rate rises and the equilibrium quantity of money stays the same.

2). The demand for money curve is downward sloping showing the negative relationship between the interest rate and the quantity of money demanded. The opportunity cost of holding money is the interest rate forgiven, at a higher interest rate the opportunity cost for holding money is high and vice versa.

Ans: A higher interest rate raises the opportunity cost of holding cash.

3). The money is the most liquid assets of all, so it very convenient to use relative to the bonds. The bonds pay a higher interest rate than the money but it is less convenient to use for the payments. The bonds cannot be also easily converted into be money.

Ans: bonds pay more interest but are less convenient relative to money.