1. Explain how each of the following would affect the quantity of money demanded. Does the change cause a movement along the money demand curve or a shift of the money demand curve?
Short-term interest rates rise from 5% to 30%.
By increasing the opportunity cost of holding money, a high interest rate reduces the quantity of money demanded. This is a movement up and to the left along the money demand curve.
All prices fall by 10%.
A 10% fall in prices reduces the quantity of money demanded at any given interest rate, shifting the money demand curve leftward.
New wireless technology automatically charges supermarket purchases to credit cards, eliminating the need to stop at the cash register.
This technological change reduces the quantity of money demanded at any given interest rate. So it shifts the money demand curve leftward.
In order to avoid paying a sharp increase in taxes, residents of Laguria shift their assets into overseas bank accounts. These accounts are harder for tax authorities to trace but also harder for their owners to tap and convert funds into cash.
This will increase the demand for money at any given interest rate. With more of the economy’s assets in overseas bank accounts that are difficult to access, people will want to hold more cash to finance purchases.