Monetary policy is the behavior of the Federal Reserve regarding the money supply.The transaction motive is the main reason that people hold money – to buy things.Optimal balances would decrease because it opportunity cost of holding money goes up.24. What is the nonsynchronization of income and spending?25. What is the relationship between interest rates or yields on bonds and their price or market value?26. Summarize the determinants of the demand for money.Difficulty:E Type: D28. Explain the transaction and speculation motives for holding money.29. Explain what demands make up the total demand for money.30. Explain the trade-off between holding bonds and holding money. Why don't people keep all their assets in the forms that are the easiest to use for making transactions?31. Draw a demand curve for money. Explain the two factors that could cause an increase in the demand for money.Difficulty: E Type: C33. Explain what is meant by the "speculation motive" for holding money.34. Explain all of the determinants of money demand. Also include a brief explanation of how a change in each of these determinants would cause a reduction in money demand.49. Use a graph to illustrate the effect an expansionary fiscal policy will have on the money market. What happens to the interest rate? What impact will this have on the effectiveness of fiscal policy?Difficulty: M Type: CDifficulty: M Type: CDifficulty: M Type: A53. Answer the following three questions dealing with monetary policy.(a) Explain how the Federal Reserve might carry out a "tight" monetary policy.55. Explain what is meant by the "transactions motive" for holding money.56. Explain what effect an increase in the brokerage fees associated with the purchase and sale of bonds will have on money demand and on the equilibrium interest rate.58. Suppose there is an excess demand for money. Explain what will happen in the money market as a result of this.59. What is meant by the term structure of interest rates?60. Assume the money market is initially in equilibrium. Now, suppose the Fed sells bonds. Graphically illustrate and explain what effect this Fed open-market sale of bonds will have on the money market.Difficulty: M Type: ADifficulty: M Type: AA Treasury bill is a government security that matures in less than a year.Test Item File 3: Principles of Macroeconomics 11(24) Money Demand, the Equilibrium Rate, and Monetary Policy The Demand for Money1. Define what economists mean by the term interest rate.The interest rate is the annual interest payment on a loan expressed as a percentage of the loan. Equal to the amount of interest received per year divided by the amount of the loan.Difficulty: E Type: D2. In broad terms what is monetary policy?Monetary policy is the behavior of the Federal Reserve regarding the money supply.Difficulty: E Type: D3. What are the two major forces that determine the demand for money?The two major forces that determine the demand for money are the interest rate and the dollar volume of transactions. The latter is a function of aggregate output and the price level.Difficulty: E Type: F4. One rationale for holding money is the transaction motive. Explain what this means.The transaction motive is the main reason that people hold money – to buy things.Difficulty: E Type: C202Test Item File 3: Principles of Macroeconomics5. What is meant by the nonsynchronization of income and spending?Nonsynchronization is the mismatch between the timing of money inflow to the household and the timing of money outflow for household expenses.Difficulty: E Type: C6. Assume that Joe earns $2400 a month, deposits it in a checking account and draws down his income evenly throughout the course of the month with an average money holding of $1200. What are the costs of this money strategy?What is wrong with this strategy is that Joe is giving up interest on his funds, interest he could be earning if he held some of his funds in interest-bearing bonds instead of in his checking account.Difficulty: E Type: D7. Assume that the interest rate paid on bonds rises from 4% to 6%. Explain what would happen to the level of optimal (money) balances.Optimal balances would decrease because it opportunity cost of holding money goes up.Difficulty: E Type: D8. Explain briefly what the optimal balance of money strategy is.It is the level of average money balances that earn the most profit taking into account both the interest earned on bonds and the costs paid for switching from bonds to money.Difficulty: E Type: D9. Explain why money management is costly.Money management is costly because there are brokerage fees and other costs to buy and sell bonds. In addition, there are costs associated with spending time waiting in line and conducting the transactions.Difficulty: E Type: C10. Draw the demand curve for money balances and explain how the interest rate affects the number of switches that an individual would make between money balances and bonds.203Chapter 11 (24): Money Demand, The Equilibrium Interest Rate, andMonetary Policy As interest rates fall, the opportunity cost of holding money drops as well. Therefore, we would expect to see households switching some of their assets frombonds to money.Difficulty: E Type: D11. Explain why the theory of money demanded presented in the book may be more complicated in real life.The theory explained in the book assumes that a person knows the exact timing of his or her income and spending. In reality, both of these activities may have some uncertainty attached to them. First, some people are paid in irregular intervals. Secondly, there can be some expenses that can occur unexpectedly like car repairs or medical expenses.Difficulty: E Type: D12. How do changes in interest rates affect the composition of bonds and money that people will want to hold?When interest rates are high, people want to take advantage of the high return on bonds, so they choose to hold very little money and hold more bonds.Difficulty: E Type: D13. Explain the speculative motive for holding money.204Test Item File 3: Principles of MacroeconomicsInvestors may wish to hold bonds when interest rates are high with the hope of selling them when interest rates fall. This can be profitable since the market value of bonds varies inversely with the interest rate. When interest rates rise bond prices tend to fall. You may speculate that interest rates are higher than normal and expect interest rates to drop. When interest rates fall bond