Question

Question 1 (1 table and a question below it, 1 point total)

In chapter 10, the demand for money was given as:

L=k * Y-h* i

In chapter 16, we created an alternate model for the demand of money, given as:

L=sqrt(tc*y)/ sqrt(2*i)

How does money demand change in each of the scenarios below? You only have to say increase/decrease/stay the same/can’t tell. (Example for the top left cell: “When GDP increases, the IS-LM money demand model predicts that money demand increases”)

	IS-LM Money Demand	Transactions Motive Model
GDP increases	Increases
Income decreases
Interest rate increases
Interest rate decreases

Do both models always agree on the direction of change?

Answer 1

How does money demand change in each of the scenarios below?

	IS-LM Money Demand	Transactions Motive Model
GDP increases	Increases	Can't tell
Income increases	Can't tell	Increases
Interest rate increases	Decreases	Decreases
Interest rate decreases	Increases	Increases

Both the models generally agree with the direction of change.

High interest rates decrease the demand for money, and vice versa.

The IS-LM model refers to GDP, while the alternate model refers to income.