1. State whether you agree or disagree with the following statements and explain
ID: 1207783 • Letter: 1
Question
1. State whether you agree or disagree with the following statements and explain why. (30 points)
a. 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.
b. Inflation, a rise in the price level, causes the demand for money to decline. Because inflation causes money to be worth less, households desire to hold less of it.
c. If the Fed buys bonds in the open market and at the same time we experience a recession, interest rates will no doubt rise.
Explanation / Answer
a. Agree, Increase in GDP will Increase the demand for money due to growing money firms need money to produce more output and expecting consumption to be high. When Consumption increases household will need more money to consume and firms will give more wages to get that output. People will always consume less and save more therefore supply of money expands.
b. Aggree house hold if consume more than they will end up paying more by consuming less of it. therefore household will choose to consume less and save more.
c. Disagree, Byuing bonds will tend to increase money supply and hence it lowers the interest rate. In times of recession fed will try to increase the money supply and cut down interest rates in order to raise the sentiments of the business which will help economy to come out of recession.
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