Consider Scenario 1 Below

question 126

Multiple Choice

Consider Scenario 1 below:
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.
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:

Monopoly

A market structure where a single firm controls the entire market for a good or service, with no close substitutes available.

Market Price

The present rate at which a product or service is being traded in the market.

Perfectly Competitive

A market structure where many firms offer products or services that are similar, leading to no single firm having significant market power.

Total Market

The total market refers to the entire demand for a specific good or service within a given geographic area or industry.