State whether you agree or disagtce with the following \'fate meats and explain?

Question

State whether you agree or disagtce with the following 'fate meats and explain? why?When the real economy expands ( y rises), the demand for money expands. As a result, households hold more cash and the supply of money expands Inflation, a rise in the price level, causes the demand tor money to decline. Because inflation causes money to be worth less. households want to hold less ot it. It the Fed buys bonds in the open market and at the same time we experience a recession, interest rates will no doubt rise During 2003, we began to stop worrying that inflation was a problem. Instead, we began to worry about deflation, a decline if. the price level. Assume that the Fed decided to hold the money supply constant. What impact would deflation have on interest rates?

Explanation / Answer

A) Disagree.

When the real economy expands, the demand for money expands, and the interest rate rises. As a result the households will hold less cash with them, as they can get higher interest than before. Money supply will remain unchanged.

B) Disagree

Inflation mean rise in the level of price, will cause the demand for money to increase.Because inflation causes money to be worth less, households want to hold less of it.

C) Disagree

If the Fed buys bonds in the open market,the supply of money increases, which makes interest rates to fall. When we experience a recession, the money demand decreases and the interest rates will fall.

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