MonPol UNIT 5 FINALS

The ATM Model of the Demand for Cash Examines a person’s money-holding decision based on:

• Spending habits

• Transaction costs

• Risk of loss/theft

• The nominal interest rate

• Purchasing Power

S1: There is a need to minimize the total cost of holding cash when the number of days between trips to ATM rises

S2: The Variables of the ATM Model applies to multiple groups of people

• S1 is TRUE, S2 is FALSE

• S1 is FALSE, S2 is TRUE

• Both are TRUE

• Both are FALSE

Answer explanation

(TRUE) S1: There is a need to minimize the total cost of holding cash when the number of days between trips to ATM rises

(FALSE) S2: The Variables of the ATM Model applies to multiple groups of people - should be to a SINGLE PERSON ONLY

Visit to ATM is affected by various factors such as:

• Higher spending

• Higher interest rates

• Lower chances of theft/loss

• Higher money demand

• Lower inflation rate

All are Exogenous Variables except:

1. 1. Independent

2. 2. Nominal interest rate

3. 3. Daily spending

4. 4. Cost of visits to the ATM

5. 5. Possibility of loss or theft

6. 6. Average cash balances

   77. 7. Amount withdrawn

• 4 & 7

• 3 & 5

• 6 only

• 6 & 7

• None of the above

All are Endogenous Variables except:

1. 1. Dependent

2. 2. Daily spending

3. 3. Number of Days between visits to the ATM

4. 4. Possibility of loss or theft

5. 5. Average cash balances

   77. 6. Amount withdrawn

• 4, 6, & 1

• 3 & 5

• 3 & 4

• 2 & 4

• None of the above

What model Illustrates how money demand and supply determine the nominal interest rate?

Allows changes in variables over time; a model in which actions that occur at one time affect what happens at other times

S1: The Liquidity Preference model demonstrates the liquidity effect, the inverse relationship between the money supply and the nominal interest rate

S2: The Liquidity Preference model is widely believed to be the primary short-run effect of contractionary monetary policy

• S1 is TRUE, S2 is FALSE

• S1 is FALSE, S2 is TRUE

• Both are TRUE

• Both are FALSE

Answer explanation

(TRUE) S1: The Liquidity Preference model demonstrates the liquidity effect, the inverse relationship between the money supply and the nominal interest rate

(FALSE) S2: The Liquidity Preference model is widely believed to be the primary short-run effect of EXPANSIONARY monetary policy

S1: Inflation rate and nominal interest rate are both dependent over time

S2: In any dynamic model, the economy starts in a steady state, in which the key variables in the model are constant or else growing at a constant rate

• S1 is TRUE, S2 is FALSE

• S1 is FALSE, S2 is TRUE

• Both are TRUE

• Both are FALSE

Answer explanation

Keri pa?? keri ipasa?

S1: Shocks only affects variables in the long-run

S2: Dynamic model is not interested in how shocks affect the model

• S1 is TRUE, S2 is FALSE

• S1 is FALSE, S2 is TRUE

• Both are TRUE

• Both are FALSE

Answer explanation

SHOULD BE:

S1: Shocks can affect variables in both short and long-run

S2: Dynamic model is interested in how shocks affect the model