Answer to Question #252120 in Macroeconomics for Biba

Question

3. The implicit cost of checking accounts is equal to the difference between the yield on safe short-term assets (such as Treasury bills) and the interest rate on checking accounts. What are the impacts of the following on the opportunity cost of holding money in checking deposits? a. Before 1980 (when checking deposits had a zero interest rate under law), market interest rates increased from 8 to 9 percent. b. In 2007 (when interest rates on money were one-quarter of market interest rates), interest rates declined from 4 to 2 percent. c. How would you expect the demand for checking deposits to respond to the change in market interest rates under a and b if the elasticity of demand for money with respect to the implicit cost of money is 1?

Answer 1

a) So, when you notice a question, search for a way to get to the solution. Let's take a look at the first one, which is the rise in market interest rates. No. Mhm. The percentage has risen from 8% to 9%. This Will result in a 1% boost in the chance of holding money. This is because funds had been invested. It would have yielded a 1% increase in profit. Since a result, the cost of keeping cash has decreased as the interest rate will equal the initial market rate. Is equivalent to four. The initial rate of interest on money is one. And the cost of keeping cash is equivalent to 4 -1, or three.

b) The opportunity cost of keeping money will rise by 1% as the interest rate on checking accounts rises. If the money had been invested, we would have received a 1% higher return. So the second argument is that the cost of storing money will decrease since the interest rate will equal four actual market interest rates, and money will be similar to one. As a result, the cost of keeping cash is equivalent to four months, divided by three.

c) Because the cost of keeping money decreases when market interest rates fall. It makes short-term investments less costly. The third point is the elasticity of money or the change in their demand for money due to a change in the interest rate. If the elasticity of money is -1, an increase in the interest rate causes an equal and opposite drop in the demand for money. As a result, if the market interest rate rises by 1%, the need for cash falls by 1%. As a result, the amount available for checkable deposits reduces.