Let's conSider the effects of ah introduction of the ATM machines (back in the 1980s). Imagine that the cost of going to the bank and exchange money for bonds or bonds for money is y cookies. Imagine also that the nominal interest rate is R, the price level is P and the REAL income that consumers will want to spend is y. Imagine that the entire yearly income is transferred to their bank accounts at the beginning of the year. Consumers consume continuously throughout the year. (a) What is the TOTAL cost of holding M dollars on average over the year? (Note: the total cost is the sum of the opportunity cost and the cost of going to the bank N times a year). (b) What is the relation between the number of trips to the bank, N, and the average money demand, M? (c) What is the optimal money demand? What are the factors that affect

ENGR.ECONOMIC ANALYSIS
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Chapter1: Making Economics Decisions
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Let's consider the effects of an introduction of the ATM machines (back in
the 1980s).
Imagine that the cost of going to the bank and exchange money for bonds
or bonds for money is y cookies. Imagine also that the nominal interest rate is R,
the price level is P and the REAL income that consumers will want to spend is y.
Imagine that the entire yearly income is transferred to their bank accounts at the
beginning of the year. Consumers consume continuously throughout the year.
(a) What is the TOTAL cost of holding M dollars on average over the year?
(Note: the total cost is the sum of the opportunity cost and the cost of
going to the bank N times a year).
(b) What is the relation between the number of trips to the bank, N, and the
average money demand, M?
(c) What is the optimal money demand? What are the factors that affect
money demand? Explain each factor INTUITIVELY.
(d) What is the effect of the introduction of the ATM machine on p?
(e) What is the effect of the introduction of the ATM machine on money
demand?
Imagine that the macroeconomy is best described by the CLASSICAL
MODEL.
(f) What are the effects of the introduction of the ATM machine on real GDP,
Yt, real consumption, ct, the real interest rate, r¿, and the price level, P?
(make sure you analyze both the direct and indirect effects).
Imagine now that prices are "sticky" and the world is best described by the
KEYNESIAN MODEL.
(g) What are the effects of the introduction of the ATM machine on real GDP,
Yt, real consumption, ct, the real interest rate, rt, and the price level, P?
What are the effects in the short run? What are the effects in the long run?
(h) How does your answer differ from (g)?
Transcribed Image Text:Let's consider the effects of an introduction of the ATM machines (back in the 1980s). Imagine that the cost of going to the bank and exchange money for bonds or bonds for money is y cookies. Imagine also that the nominal interest rate is R, the price level is P and the REAL income that consumers will want to spend is y. Imagine that the entire yearly income is transferred to their bank accounts at the beginning of the year. Consumers consume continuously throughout the year. (a) What is the TOTAL cost of holding M dollars on average over the year? (Note: the total cost is the sum of the opportunity cost and the cost of going to the bank N times a year). (b) What is the relation between the number of trips to the bank, N, and the average money demand, M? (c) What is the optimal money demand? What are the factors that affect money demand? Explain each factor INTUITIVELY. (d) What is the effect of the introduction of the ATM machine on p? (e) What is the effect of the introduction of the ATM machine on money demand? Imagine that the macroeconomy is best described by the CLASSICAL MODEL. (f) What are the effects of the introduction of the ATM machine on real GDP, Yt, real consumption, ct, the real interest rate, r¿, and the price level, P? (make sure you analyze both the direct and indirect effects). Imagine now that prices are "sticky" and the world is best described by the KEYNESIAN MODEL. (g) What are the effects of the introduction of the ATM machine on real GDP, Yt, real consumption, ct, the real interest rate, rt, and the price level, P? What are the effects in the short run? What are the effects in the long run? (h) How does your answer differ from (g)?
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