Answer the Questions Below

question 7

Essay

Answer the questions below:
(A)Explain how each of the following would affect the money demand function:
1.An increase in the cost of living
2.Financial innovations that make it possible to write checks against saving and money market accounts
3.Financial innovations that make it possible to electronically pay bills out of saving and money market accounts
4.The December holiday season
(B)If the Fed maintains constant growth of the money supply, what happens to interest rates as the money demand function moves around?
(C)Given that the money demand function tends to move around, is it better policy to maintain constant growth of the money supply or a constant level of interest rates?

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Definitions:

Special Cause Variation

Variation in a process that is caused by specific circumstance, which is non-random and can usually be identified and eliminated.

Random Variation

The unpredictability in the outcome of a process, experiment, or measurement due to chance.

Lower Control Limit

The lower control limit is the lowest value on a control chart below which process variability is considered to be out of control.

Sample Proportion

A statistic that estimates the fraction of items in a population that possess a certain attribute, based on data from a sample.