Allowing Banks to Pay Interest on Their Checking Account Deposits

question 44

Multiple Choice

Allowing banks to pay interest on their checking account deposits should cause

• A) the LM curve to get flatter because larger increases in GDP could be accommodated by the same adjustment in real rates.
• B) the LM curve to get steeper because currency demand still is correlated with the real interest rate.
• C) ^{the LM curve to get steeper because demand for M}1 ^{becomes less} sensitive to changes in interest rates when rates paid on checking deposits parallel those paid by other financial assets.
• D) ^{the LM curve to become vertical because demand for M}1 ^becomes totally independent of the interest rate.
• E) none of the above.

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Definitions:

Operating Activities

Transactions and events that affect the net income of a business, involving its primary ongoing operations.

Cash Flow

The total amount of money being transferred into and out of a business, especially as affecting liquidity.

Accounts Receivable

Money owed to a company by its customers for products or services that have been delivered or used, but not yet paid for.