Question

Explain how each of the following would affect the quantity of money demanded, and indicate whether each change would cause a movement along the money demand curve or a shift of the money demand curve.
a. short-term interest rates rise from 5% to 30%
b. all price fall by 10%
c. New wireless technology automatically charges supermarket purchase to credit cards, eliminating the need to stop at the cash register.
d. in order to avoid paying taxes, a vast underground economy develops in which workers are paid their wages in cash rather than with check.

Answer 1

Answer:

a.) Increasing the opportunity cost of holding money, a high interest rate reduces the quantity of money demanded. This will lead to movement up and to the left along the money demand curve.

b.) A 10% fall in prices will reduce the quantity of money demanded at any given interest rate, which will cause the money demand curve to shift leftward.

c.) This technology change will reduce the quantity of money demanded at any given interest rate, so it will shift the money demand curve leftward.

d.) Payments in cash will require employers to hold more money which will increase the quantity of money demanded at any given interest rate, this will lead to shift in the money demand curve rightward.

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