Chapter 20: Q 11. (page 547)
In Keynes’s analysis of the speculative demand for money, what will happen to demand for money if people suddenly expect that the normal level of the interest rate has fallen? Explain your answer.
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Consider the portfolio choice theory of money demand. How do you think the demand for money would be affected during a hyperinflation (i.e., monthly inflation rates in excess of )?
Explain how the following events will affect the demand for money according to the portfolio theories of money demand:
a. The economy experiences a business cycle contraction
b. Brokerage fees decline, making bond transactions cheaper.
c. The stock market crashes. (Hint: Consider both the increase in stock price volatility following a market crash and the decrease in wealth of stockholders.)
What three motives for holding money did Keynes consider in his liquidity preference theory of the demand for real money balances? On the basis of these motives, what variables did he think determined the demand for money?
Suppose a given country experienced low and stable inflation rates for quite some time, but then inflation picked up and over the past decade had been relatively high and quite unpredictable. Explain how this new inflationary environment would affect the demand for money according to portfolio theories of money demand. What would happen if the government decided to issue inflation-protected securities?
Why is Keynes’s analysis of the speculative demand for money important to his view that velocity will undergo substantial fluctuations and thus cannot be treated as constant?
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