Determine whether each of the following would lead to an increase, a decrease, or no change in the quantity of money people wish to hold. Also determine whether there is a shift in the money demand curve or a movement along a given money demand curve
a. A decrease in the price level
b. An increase in real output
c. An improvement in money?s ability to act as a store of value
d. An increase in the market interest rate
Take a shot. What do you think?
However, first consider why people wish to hold money. Obviously, money is a means of exchange. People also hold money for speculative reasons. That is, money is a asset, which could be used to pounce on investment opportunities that happen to pass by.
Decrease increase increase decrease shifrt
a. A decrease in the price level: This would lead to an increase in the quantity of money people wish to hold. When the price level decreases, people's purchasing power increases, and they will need to hold less money to conduct the same level of transactions. This would result in a movement along the given money demand curve.
b. An increase in real output: This would also lead to an increase in the quantity of money people wish to hold. With an increase in real output, there is more economic activity, resulting in a higher demand for money to facilitate transactions. This would result in a shift in the money demand curve to the right.
c. An improvement in money's ability to act as a store of value: This would lead to a decrease in the quantity of money people wish to hold. If money becomes a more reliable and effective store of value, people may opt to hold less money and instead invest in other assets. This would result in a shift in the money demand curve to the left.
d. An increase in the market interest rate: This would lead to a decrease in the quantity of money people wish to hold. When the market interest rate increases, it becomes more attractive to hold assets other than money such as bonds or savings accounts. People would prefer to invest their money where they can earn a higher return, resulting in a decrease in the demand for money. This would result in a shift in the money demand curve to the left.