Scenario 1 Consider Two Money Management Strategies. the First Strategy Is Called

question 12

Multiple Choice

Scenario 1
Consider two money management strategies. The first strategy is called the cash strategy in which an individual deposits her monthly earnings in a checking account and draws down equal amounts each day to finance her daily expenditures. Assume that she earns no interest on her checking accounts and funds are exhausted at the end of the month. The second strategy is called the bond fund strategy. Here the individual deposits one-quarter of her earnings in a checking account and the remaining three-quarters in a bond fund. The bond fund pays 1% interest per month. At the end of the week when the money in the checking account is exhausted, the individual replenishes it by withdrawing another one-quarter of her earnings from the bond fund for the next week. This process is repeated at the end of the second week and third week until the bond fund is exhausted.
-Refer to Scenario 1. In which strategy will the quantity of money demanded be greater?

• A) the cash strategy
• B) the bond fund strategy
• C) It will be the same in either strategy.
• D) There is insufficient information to answer the question.

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Definitions:

Producer Surplus

The discrepancy between the price at which sellers are prepared to offer a product and the actual price it sells for.

Total Surplus

The sum of consumer and producer surplus, representing the total net benefit to society from the production and consumption of goods.

Free-Trade Policy

A policy approach that encourages international trade by minimizing tariffs, duties, and other barriers to import and export.

World Price

The international market price of a good or service, determined by global supply and demand, which influences domestic prices and competition.