a)Suppose the demand for real money balances is described by the equation L = kY - hi, where Y is real GDP and i is the market interest rate. Assuming initially that Y = Y₀and the demand for money (L) is drawn in a diagram with respect to interest rates measured on the vertical axis then:a fall in interest rates with no change in real GDP will change the quantity of money demanded, moving down to the right along the L curve.

a rise in real GDP with no change in interest rates will change the quantity of money demanded, moving down to the right along the L curve.

a fall in real GDP with no change in interest rates will increase the demand for money shifting the L curve to the right.

a rise in interest rates with no change in real GDP will reduce the quantity of money demanded, shifting the L curve to the left.

b)

If the money market in the diagram is not in equilibrium at the interest rate i₁:portfolio managers will buy bonds to increase their bond holdings, pushing bond prices up and interest rates down until equilibrium is established.

portfolio managers will lobby banks and central banks to increase their lending, deposits and the money supply.

portfolio managers will sell bonds to increase their money holdings, pushing bond prices down and interest rates up until equilibrium is reached.

portfolio managers with be content with their holdings of bonds and money balances because low interest rates a good for consumers.

c)The current market price of a $100 bond with a $5.00 annual coupon and 10 yrs to maturity is:the present value at today's interest rate of $100 paid 10 years from now.

the sum of its face value, $100, times ten years plus its annual coupon, $5.00, times ten years.

the present value at today's interest rate of $100 paid 10 years from now plus the present values of the annual $5.00 coupons paid over the next ten years.

the sum of its face value, $100, plus all its annual $5.00 coupons.

d)If portfolio managers and private individuals expect market interest rates will fall in the near future they will:move quickly to buy bonds and shift portfolios from money to bonds before interest rates fall.

move quickly and sell bonds to shift portfolios from bonds to money before interest rates fall.

do nothing because the coupon payments and yields on bonds they hold will not change with a change in current market interest rates.

congratulate themselves on their wisdom in currently holding bonds in their portfolios.

e)Suppose the current market interest rate is 4.0 per cent. Then the present value of a sum of $1000 you expect to receive three years from today is approximately:$1000.00

$889.00

$1125.00

$988.90