Chapter 28, Problem 1CYU

a)

To determine

Effect on quantity demanded if, short-term interest rates rise from 5% to 30%.

Explanation of Solution

Interest rates and the amount of money demanded in the economy are inversely correlated with the demand for money. As a result, the quantity of money demanded increases when interest rates are lower and decreases when interest rates are higher. By shifting the demand curve, these rises and declines alter the equilibrium level.

Reduced money demand and a shift along the demand curve will result from an increase in interest rates from 5% to 30%.

Economics Concept Introduction

Introduction: The quantity theory of money is one of the main areas of study for the subject of economics known as monetary economics.

The quantity theory of money states that, under the assumption that real output is constant and money velocity is constant, the general level of prices for goods and services in an economy is proportionate to the money supply.

The forces that affect the supply and demand of any good or service also affect the supply and demand of money: ceteris paribus, an increase in the quantity of money results in a fall in the marginal value of money, which lowers the purchasing power of one unit of currency.

b)

To determine

Effect on quantity demanded if , All prices fall by 10%.

Explanation of Solution

The amount of money required and the pricing level should be in harmony with one another. Additionally, proportionate, this association is positive. Therefore, every change in the level of prices in the market will result in a corresponding change in the amount of money needed in the economy. People must hold more money to purchase the same amount of goods and services due to inflation.

If all prices increase by 10%, less money will be demanded, which will cause the demand for money to shift to the left.

Economics Concept Introduction

Introduction: The quantity theory of money is one of the main areas of study for the subject of economics known as monetary economics.

The quantity theory of money states that, under the assumption that real output is constant and money velocity is constant, the general level of prices for goods and services in an economy is proportionate to the money supply.

The forces that affect the supply and demand of any good or service also affect the supply and demand of money: ceteris paribus, an increase in the quantity of money results in a fall in the marginal value of money, which lowers the purchasing power of one unit of currency.

c)

To determine

Effect on quantity demanded if, Elimination of the need to stop at the cash register due to emerging technology.

Explanation of Solution

Changes in technology that allow customers to charge with their credit cards without hassle reduce the demand for money as customers feel like they don't have to carry cash all the time.

As technology changes reduce the demand for money, the demand curve shifts to the left.

Economics Concept Introduction

Introduction: The quantity theory of money is one of the main areas of study for the subject of economics known as monetary economics.

The quantity theory of money states that, under the assumption that real output is constant and money velocity is constant, the general level of prices for goods and services in an economy is proportionate to the money supply.

The forces that affect the supply and demand of any good or service also affect the supply and demand of money: ceteris paribus, an increase in the quantity of money results in a fall in the marginal value of money, which lowers the purchasing power of one unit of currency.

d)

To determine

Effect on quantity demanded if, shifting of assets to avoid higher taxes.

Explanation of Solution

Ligurian people avoid paying taxes here. Therefore, they are willing to move their assets to offshore accounts and reduce their liquidity. Citizens are still willing to do this because they want to avoid paying high taxes. A tax increase can therefore be interpreted as reducing the demand for money and shifting the demand curve to the left.

Economics Concept Introduction

Introduction:

The quantity theory of money is one of the main areas of study for the subject of economics known as monetary economics.

The quantity theory of money states that, under the assumption that real output is constant and money velocity is constant, the general level of prices for goods and services in an economy is proportionate to the money supply.

The forces that affect the supply and demand of any good or service also affect the supply and demand of money: ceteris paribus, an increase in the quantity of money results in a fall in the marginal value of money, which lowers the purchasing power of one unit of currency.