Check Your Understanding

1. Question

   Explain how each of the following would affect the quantity of money demanded, and indicate whether each change would cause a movement along the money demand curve or a shift of the money demand curve.

   1. The short-term interest rate rises from 5% to 30%.

   2. All prices fall by 10%.

   3. New wireless technology automatically charges supermarket purchases to credit cards, eliminating the need to stop at the cash register.

   4. In order to avoid paying taxes, a vast underground economy develops in which workers are paid their wages in cash rather than with checks.

2. Question

   How will each of the following affect the opportunity cost or benefit of holding cash? Explain.

   1. Merchants charge a 1% fee on debit/credit card transactions for purchases of less than $50.

   2. To attract more deposits, banks raise the interest paid on six-month CDs.

   3. The cost of food rises significantly.