<p>1) For each cases describe the effect on money market: A. Decrease in the interest rate: Money ( Demand / Supply ) will ( Increase / Decrease) because _money is less costly to hold, you’ll keep less in savings and more money, and velocity will decrease_. This creates a potential money ( shortage / surplus ) and the market will adjust _prices_ ( higher / lower )</p><p>B. Increase in the Monetary Base: Money ( Demand / Supply ) will ( Increase / Decrease) because _the government made more money_. This creates a potential money ( shortage / surplus ) and the market will adjust _prices_ ( higher / lower )</p><p>C. Because of Y2K (or 9/11), people decreased their preference for bank money and preferred currency: Money ( Demand / Supply ) will ( Increase / Decrease) because _with less deposits, banks have less money to lend and multiply, and the money multiplier goes down_. This creates a potential money ( shortage / surplus ) and the market will adjust _prices_ ( higher / lower )</p><p>D. Increase in future inflation (the coming inflation rate over the next year): Money (Demand / Supply ) will ( Increase / Decrease) because _future inflation will devalue your money, so you want to hold less, and velocity will increase – this is the same as an increase in nominal interest rate_. This creates a potential money ( shortage / surplus ) and the market will adjust _prices_ ( higher / lower )</p><p>E. Increase in real income: Money (Demand / Supply ) will ( Increase / Decrease) because _there’s more stuff to buy_. This creates a potential money ( shortage / surplus ) and the market will adjust _prices_ ( higher / lower )</p><p>F. The Fed increases reserve requirements: Money ( Demand / Supply ) will ( Increase / Decrease) because _banks have to keep more in reserve so there’s less to lend out and multiply and the money multiplier goes down_. This creates a potential money ( shortage / surplus ) and the market will adjust _prices_ ( higher / lower )</p><p>G. The Fed conducts OMO purchases: Money ( Demand / Supply ) will ( Increase / Decrease) because _the government injected more money into the economy_. This creates a potential money ( shortage / surplus ) and the market will adjust _prices_ ( higher / lower ) H. The government changes the currency, replacing 1 new bill for every old 1000 bills: Money ( Demand / Supply ) will ( Increase / Decrease – by a factor of 1000 ) because _the government decreased the monetary base by changing the money_. This creates a potential money ( shortage / surplus ) and the market will adjust _prices_ ( higher / lower – by a factor of 1000 ) 2) List all of the factors that would cause an increase in money demand: Increase in Income Decrease in Velocity, which would be caused by: Decrease in the nominal interest rate (lower real rate or lower inflation rate) Increase in the cost of banking</p><p>3) List all of the factors that would cause an increase in the money supply: Increase in Monetary Base which the Fed could cause by: More OMO purchases Lowering the Discount Rate Increase in the Money Multiplier which would be caused by: Decrease in reserves (either required or excess) Increase in preference for checking as opposed to currency</p><p>4) List all of the reasons the price level would rise A money surplus caused by: An increase in the Money Supply Increase in Monetary Base which the Fed could cause by: More OMO purchases Lowering the Discount Rate Increase in the Money Multiplier which would be caused by: Decrease in reserves (either required or excess) Increase in preference for checking as opposed to currency A decrease in Money Demand Decrease in Income Increase in Velocity, which would be caused by: Increase in the nominal interest rate (lower real rate or lower inflation rate) Decrease in the cost of banking</p><p>5) List all of the reasons the price level would fall See #4, reverse</p>