Suppose the Federal Reserve has set the money supply at $4 million. The table below shows the interest rate and total demand for money. Demand (in millions) Interest Rate 20% 15 10 5 0 $1 2 3 4 5 What is the equilibrium interest rate? Multiple Choice C O 10 percent 20 percent 5 percent O percent < Prev 6 of 25 Next > < # % & 8888886 $ @ 2 3 4 5 7

Interest Rate Transactions Demand for Money Asset Demand for Money Money Supply 2% $220 $300 $460 4 220 280 460 6 220 260 460 8 220 240 460 10 220 220 460     Based on the given table, an increase in the money supply of $20 billion will cause the equilibrium interest rate to   Multiple Choice   fall by 4 percentage points.   fall by 2 percentage points. Correct   rise by 4 percentage points.   rise by 2 percentage points.

9.     How would you incorporate security considerations/costs into the transactions demand model? What would this imply for the demand for currency in a relatively insecure urban environment (a) compared with a relatively safe one, (b) when owner-identified smart cards become available? Do these factors affect the demand for demand deposits? How would the proportion of currency to demand deposits be affected in these cases? 10.      Can the transactions demand model be used to explain why financial innovations in recent decades have reduced the transactions demand for M1? 11.      Are transactions demand models useless, as Sprenkle (1969) argued? If they are, how would you explain the demand for M1 or just for demand deposits in the economy?  

If a bank gets $100 in new reserves from the Fed and the required-reserve ratio is 0.2, then the O rate of interest falls in the economy O money supply grows by $500 O money multiplier is 5 O all of the above