Question

In: Economics

The opportunity cost of holding money A. is measured by the alternative interest yield obtainable by...

The opportunity cost of holding money

A. is measured by the alternative interest yield obtainable by holding some other asset.

B. refers to the amount of paper currency held by the Fed.

C. is based on the fiduciary monetary system.

D. equals the amount paid for renting a house instead of buying it.

An expansionary monetary policy results in lower interest​ rates, which in turn

A. reduces the international price of the dollar and increases net exports.

B. increases the foreign demand for U.S. financial​ instruments, lowering the international price of the dollar and decreasing net exports.

C. increases foreign demand for U.S. financial​ instruments, raising the international price of the dollar and reducing net exports.

D. reduces the foreign demand for U.S. financial instruments and reduce net exports.

The federal funds rate is

A. the interest rate at which banks can borrow excess reserves from other banks.

B. the interest rate on bonds issued by the federal government.

C. the interest rate paid on reserves held with the Fed.

D. none of the above.

The purchasing power of the dollar

A. varies directly with the price level.

B. varies directly with the price of gold.

C. varies inversely with the price level.

D. varies directly with interest rates.

Solutions

Expert Solution

Ans) option A) is currect the opportunity cost of holding money is making investments in some assets and obtaining interest , if we keep the money in liquid form then it will not give any interest but if we invest it in Fixed deposit than it will give us a fixed interest.

Ans 2) An expansionery monetary policy means the goverment wants to increase the liquidity in the market so to lower the interest rate hence make loans easy but on the other hand make its financial assets less in demand to foreigners as they pay less interest also reduces net export which is due to the fact that the doller is more in the market and with low interest rate in US the  investors will pump dollers in other countries hence doller will become strong as compare to other currencies and exports declines.

Ans 3) The federal fund rate is the rate at which a depository institution lends to other depository institutions like banks and credit union hence option A) is correct .

Ans 4) The purchasing power of a doller varies inversely with the price level hence option C) is correct.Purchasing power of doller is the appreciation in doller value in terms of purchasing a good or services which means it is inversely proportion to rise in price level or inflation which decreases the purchasing power as things becomes costly or price rise in goods or services.


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