Question

How would you expect each of the following to affect the economy-wide demand for U.S. money (currency)? a. Competition among brokers forces down the commission charge for selling holdings of bonds or stocks. The demand for money will . b. Grocery stores begin to accept credit cards in payment. The demand for money will . c. Financial investors become concerned about increasing riskiness of stocks. The demand for money will .

Answer 1

Market interest rate is also known as nominal interest rate. The nominal interest rate is sum of real interest rate and inflation rate. Fed try to control the monetary condition and real interest rates by manipulating money supply. These interest rates also affect the demand of money in market.

Part (a)

When commission of brokers decreases then buying and selling of stocks becomes easier and cheaper and people would transact in more and more stocks which will decrease the demand of money as liquidity of stock has increased.

Part (b)

When grocery store starts accepting credit cards then people would need to carry less cash and demand of money will decrease.

Part (c)

As financial investors are now worried about riskiness of stocks so they will decrease their investment in stocks and prefer holding more money so demand of money will increase.