module 28 The Money Market 275
Section 5 The Financial Sector
but consistent with, another model known as the loanable funds model of the interest
rates, which is developed in the next module. In the loanable funds model, we will see
that the interest rate matches the quantity of loanable funds supplied by savers with
the quantity of loanable funds demanded for investment spending.
Module 28 AP Review
Check Your Understanding
- Explain how each of the following would affect the quantity of
money demanded, and indicate whether each change would
cause a movement along the money demand curve or a shift of
the money demand curve.
a. Short -term interest rates rise from 5% to 30%.
b. All prices fall by 10%.
c. New wireless technology automatically charges supermarket
purchases to credit cards, eliminating the need to stop at the
cash register.
d. In order to avoid paying taxes, a vast underground economy
develops in which workers are paid their wages in cash rather
than with checks.
2. How will each of the following affect the opportunity cost or
benefit of holding cash? Explain.
a. Merchants charge a 1% fee on debit/credit card transactions
for purchases of less than $50.
b. To attract more deposits, banks raise the interest paid on
six-month CDs.
c. Real estate prices fall significantly.
d. The cost of food rises significantly.
Solutions appear at the back of the book.
Tackle the Test: Multiple-Choice Questions
- A change in which of the following will shift the money
demand curve?
I. the aggregate price level
II. real GDP
III. the interest rate
a. I only
b. II only
c. III only
d. I and II only
e. I, II, and III - Which of the following will decrease the demand for money?
a. an increase in the interest rate
b. inflation
c. an increase in real GDP
d. an increase in the availability of ATMs
e. the adoption of Regulation Q - What will happen to the money supply and the equilibrium
interest rate if the Federal Reserve sells Treasury securities?
Money supply Equilibrium interest rate
a. increase increase
b. decrease increase
c. increase decrease
d. decrease decrease
e. decrease no change
4. Which of the following is true regarding short-term and
long-term interest rates?
a. Short-term interest rates are always above long-term
interest rates.
b. Short-term interest rates are always below long-term
interest rates.
c. Short-term interest rates are always equal to long-term
interest rates.
d. Short-term interest rates are more important for
determining the demand for money.
e. Long-term interest rates are more important for
determining the demand for money.
5. The quantity of money demanded rises (that is, there is a
movement along the money demand curve) when
a. the aggregate price level increases.
b. the aggregate price level falls.
c. real GDP increases.
d. new technology makes banking easier.
e. short-term interest rates fall.