Question

Given people are not working and output is falling。1.what will that do to money demand.

2. What happens do money demand when people's income falls?

3. Who demands more money you or Bill gates?

4. what should the central banks response be on the money supply side?

5. Graph the money market before and after the virus outbreak as described above.

Answer 1

The Money demand function depends on several factors. Its positvely related with Income and Wealth, and inversely related wth interest rate.

2. As people are not working output is falling and so lots of people are recieving low income or no income at all. Thus the demand for money also decreases.

3. Bill Gates demands more money. there are two reasons, firstly he has more wealth and hence demands more money. And even though output is falling and Bill gates recieves less income it would still be more than me. hence bill gate demands more money then me.

4. The central bank could reduce the banks reserve ratio i.e the amount of money banks are required to keep in reserves. this way banks can give out more loans and increase the reduced money supply in the economy due to a fall in money demand. this can help expand the economy.

5. Refer to the image.