Use the money demand and money supply model to show the money market in equilibrium with an interest rate of 5 percent and the quantity of money of $800 billion. Suppose the Federal Reserve increases the money supply to $850 billion. At the previous
equilibrium interest rate of 5 percent, will households and firms now be holding more money or less money than they want to hold, and will they be buying or selling short-term financial assets? At the new equilibrium interest rate, households and firms will desire to hold the entire $850 billion of the money supply. What causes households and firms to want to hold the additional $50 billion of the money supply?
What will be an ideal response?
They will be holding more money than they want to hold, so they will buy short-term financial assets. The lower interest rate at the new equilibrium decreases the opportunity cost of holding money, so households and firms desire to hold more money.
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According to the law of increasing costs, as the United States expends more of its resources on reducing air pollution,
A. the quantity of other goods that must be given up for further reductions in air pollution will decrease. B. the quantity of other goods that must be given up for further reductions in air pollution will increase. C. the social cost of additional air pollution will increase. D. there will be no change in the marginal cost of reducing air pollution.
The property of diminishing marginal rate of substitution follows from the property that the indifference curve is
A) downward sloping. B) upward sloping. C) bowed in toward the origin. D) bowed out from the origin.
Public choice economists believe that:
A. incentives encourage government to provide a policy that its voting constituency likes. B. government is not subject to the laws of supply and demand. C. incentives encourage government to achieve its goal in the least-cost manner. D. government does not weigh the costs and benefits of various programs.
One might expect the interest rate correlation between nonpegs and closed economies with the base currency to be ____, but because of other circumstances, there may be a ____ correlation.
A) negative; positive B) positive; negative C) zero; positive D) negative; zero