Question

Question 71 pts

The precautionary demand for money arises

because individuals are uncertain about the future.

when nominal income exceeds potential income.

as important exceptions to the Keynesian model.

because the transaction demand for money is never adequate to absorb the money supply.

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Question 81 pts

If banks keep 8% reserves the deposit multiplier is:

12.5

8

87.5

125

Answer 1

Question 71

Precautionary demand for money implies the demand for money to deal with emergency situations.

Emergency situations arises due to uncertainty with respect to future.

Thus, the precautionary demand for money arises because individuals are uncertain about the future.

Hence, the correct answer is option (1) [because individuals are uncertain about the future].

Question 81

Required reserve ratio (rr) = 8% or 0.08

Calculate the deposit multiplier -

Deposit multiplier = 1/rr = 1/0.08 = 12.5

The deposit multiplier is 12.5

Hence, the correct answer is the option (1) [12.5].