Figure 21-2

question 264

Multiple Choice

Figure 21-2. On the left-hand graph, MS represents the supply of money and MD represents the demand for money; on the right-hand graph, AD represents aggregate demand. The usual quantities are measured along the axes of both graphs.
-Refer to Figure 21-2. Assume the money market is always in equilibrium, and suppose r₁ = 0.08; r₂ = 0.12; Y₁ = 13,000; Y₂ = 10,000; P₁ = 1.0; and P₂ = 1.2. Which of the following statements is correct?

• A)When r = r₂, nominal output is higher than it is when r = r₁.
• B)When r = r₂, real output is higher than it is when r = r₁.
• C)When r = r₂, the expected rate of inflation is higher than it is when r = r₁.
• D)If the velocity of money is 4 when r = r₂, then the quantity of money is $3,000.

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Definitions:

Asian Call Option

A type of call option where the payoff depends on the average price of the underlying asset over a specified period rather than at maturity.

Underlying Asset

The financial asset upon which derivative contracts, such as options and futures, are based.

Exercise Price

The price at which the holder of an option can buy or sell the underlying security or commodity.

Convertible Bonds

Bonds that can be converted into a predetermined number of the company's equity shares at certain times during the bond's life, usually at the discretion of the bondholder.