ECON 203 Lecture 9: ECON 203 Ch 9

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rubyworm465

4 Dec 2018

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Document Summary

The demand for money comes in three parts, namely: the transactions demand, the precautionary demand; and, the asset or speculative demand (switching between bonds and money based on their own forecasts of future interest rates) L demand to hold real money balances k the change in demand for real money h change in money balances ( in response to a change in i) At higher interest rates the opportunity cost of holding money balances is higher because the expected return from holding bonds is positiv. At higher interest rates the opportunity cost of holding money balances is higher because the expected return from holding bonds is positive. Money demand changes when: i causes movement along l function, y causes shift of l function. Demand for money means the demand for holding money: a financial portfolio is a basket of financial assets, assumption: our portfolio includes two items: Money: a medium of exchange, no return/interest rate income.

Related Questions

A. Match the correct motive (Precautionary Demand for money / Speculative Demand for money / Transactional Demand for Money) for holding money to the following definitions:

1. The stock of money people hold to take advantage of future changes in the prices of financial assets other than money.

2. The stock of money people hold to pay unpredictable expenses.

3. The stock of money people hold to pay everyday predictable expenses.

B. Identify the motive for holding money in the following scenario:

Musashi moves to a smaller apartment. Because of the lower monthly rent, he places a larger share of funds from his paycheck in a retirement fund and a smaller share in his savings account. This is an example of a decrease in Musashi's ____________________ demand for money.

C. Complete the following statement about the relationship between the interest rate and speculative balances.

As the interest rate rises, the opportunity cost of holding money _______________ and people ______________ their speculative balances.

blackcaribou48

1. Match the correct motive (Precautionary, Speculative, or Transactions) for holding money to the following definitions.

Definition
The stock of money people hold to pay unpredictable expenses
The stock of money people hold to take advantage of future changes in the prices of financial assets other than money
The stock of money people hold to pay everyday predictable expenses

2. Identify the motive for holding money in the following scenario.

Daesun moves to a smaller apartment. Because of the lower monthly rent, he places a larger share of funds from his paycheck in a retirement fund and a smaller share in his savings account. This is an example of a decrease in Daesun's (Precautionary, Speculative, or Transactions) demand for money.

Complete the following statement about the relationship between the interest rate and speculative balances.

3. As the interest rate falls, the opportunity cost of holding money (rises, falls), and people (decrease, increase) their speculative balances.