1. State whether you agree or disagree with the following statements and explain

Question

1. State whether you agree or disagree with the following statements and explain why.

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) False. When Y and D rises, Interest rate rises, people holds lesser cash.

b) False. When price increases due to inflation people demand more money.

c) False. When Fed buys bonds, money supply increases and decreases interest rate.

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