Question

n January 2013, you can put your savings in a Bank of America account and be paid 2.5 percent per year. During 2013, suppose the inflation rate is 3.6 percent. In 2013 you earned a real interest rate of

a.) 0.59%

b.)6.8%

c.)1.1%

d.) -1.1%

The demand for money curve is the relationship between ________ and ________, other things remaining the same

a.) the quantity of nominal money demanded; the real interest rate

b.) the quantity of real money demanded; the real interest rate

c.) the quantity of nominal money demanded; the nominal interest rate

d.) the quantity of real money demanded; the nominal interest rate

The money demand curve will shift out of to the right if there is

a.) an increase in real GDP.

b.) a decrease in real GDP

c.) an increase in the monetary base.

d.)a decrease in the monetary base

Answer 1

The interest to be received by the individual was 2.5%. Inflation rate was 3.6%. Hence the real interest is nominal interest rate - the rate of inflation = 2.5%-3.6% = -1.1%.

Hence the correct option is

d) -1.1%.

The demand for money curve is the relationship between THE QUANTITY OF REAL MONEY DEMANDED and THE NOMINAL INTEREST RATE, other things remaining the same. The correct option is

b.) the quantity of real money demanded; the nominal interest rate

An increase in GDP will raise the demand for money because people will need more money to make the transactions necessary to purchase the new GDP.

The correct option is therefore,

a.) an increase in real GDP.