Suppose that expected inflation rises by 7 percent at the same time that the yie

Question

Suppose that expected inflation rises by 7 percent at the same time that the yields on money and on non-money assets both rise by 7 percent. What will happen to the demand for money? What if expected inflation rose by only 6 percent? What if the yield on non-money assets rose by 8 percent?

Money demand depends in part on its opportunity cost, the difference between the real yield on non-money assets and the real yield on money. If expected inflation rises by 7 percent as the yields on money and on non-money assets also rise by 7 percent, the expected real yields on money and on non-money assets _______ decreaseare unchangedincrease and the demand for money _______ will not be affectedincreasesdecreases. If expected inflation rises by 6 percent, the expected real yields on money and on non-money assets both (Click to select) remain unchangedrise by 2 percentrise by 1 percent and the demand for money will _______ decreaseincreasenot be affected. If the yield on non-money assets rises by 8 percent while the yield on money rises by only 7 percent, then the return to alternative investments relative to the return on money _______ is unaffectedfallsrise, regardless of the level of inflation. This ______ reducesincreases the portfolio demand for money.

Explanation / Answer

If inflation rises by 7% and yield on money and non money assets also increases by 7%,then real rate of return will not change and demand would remain unchanged.

If inflation rises by 6% and yield on money and non money assets increases by 7%,then real rate of return will increase and demand would also increase.

If inflation rises by 8% and yield on money and non money assets increases by 7%,then real rate of return will decrease and demand would also decrease.

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