CHAPTER 4
Quick Check
1. a. False. Wealth is a stock and income is a flow.
2. a. i=0.05: money demand = $18,000
b. Money demand decreases when the interest rate increases because bonds, which pay
3. a. i=100/$PB –1; i=33%; 18%; 5% when $PB =$75; $85; $95.
4. a. $20=MD=$100(.25-i)
DigDeeper
5. a. BD = 50,000 – 60,000 (.35-i)
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c. An increase in income increases money demand, but decreases bond demand, since we
d. First of all, the use of “money” in this statement is colloquial. “Income” should be
6. Essentially, the reduction in the price of the bond makes it more attractive. A bond promises
7. a. $16 is withdrawn on each trip to the bank.
b. Average money holdings are ($16+$12+$8+$4)/4=$10.
c. $8 is withdrawn on each trip to the bank.
8. a. All money is in checking accounts, so demand for central bank money equals demand for
b. $100B = 0.1($5,000B)(.8-4i)
c. Since the public holds no currency,
d. If H increases to $300B the interest rate falls to 5%.
e. The interest rate falls to 5%, since when H equals $300B, M=(10)$300B=$3,000B.
9. Choosing the quantity of money or choosing the interest rate
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10. Monetary policy in a liquidity trap.
a. $20 B
b. $20 B
c. Yes, the central bank can continue to increase the money supply. But interest rates will
Explore Further
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