Suppose a Family Is Holding $1000 in Its Checking Account

question 103

Multiple Choice

Suppose a family is holding $1000 in its checking account for normal transactions, $500 in cash for emergencies, and $1500 as a store of value when the interest rate is 4 percent. If the interest rate rises to 10 percent, which of the following patterns of holding money would be most likely and why?

• A) Transactions demand-$1000; Precautionary demand-$350; Asset demand-$500, because the opportunity cost of holding money has increased. The reduction money balances held as an asset is greatest because interest-bearing assets are much more attractive when interest rates are higher.
• B) Transactions demand-$500; Precautionary demand-$500; Asset demand-$1400, because the opportunity cost of holding money balances has risen. The reduction in money balances held for transaction purposes falls the most because people start using credit cards more when the opportunity cost of holding money increases.
• C) Transactions demand-$1000; Precautionary demand-$500; Asset demand-$500, because only the asset demand is responsive to changes in the interest rate.
• D) Transactions demand-$800; Precautionary demand-$600; Asset demand-$1500, because people can economize on their money balances for making transactions, but the possibility of an emergency increases with the interest rate. People will also expect rates to go higher, so they will hold money as an asset until the rates increase further.

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Definitions:

Immunoglobulin

Proteins in the blood plasma produced by B cells that act as antibodies to help fight infections.

T Cells

A type of lymphocyte that plays a central role in cell-mediated immunity, developed in the thymus.

Thymus

A specialized primary lymphoid organ of the immune system, where T cells mature, located in the chest between the lungs.

Specific Immunity

Immunity that is characterized by the body's ability to recognize and specifically respond to particular pathogens or foreign substances.