Part 1 - Check Your Understanding-Answer the following questions.

1.What are the two reasons why people demand money?

2.Why is the interest rate the opportunity cost of holding money?

3.What is the relationship between the interest rate and the quantity demanded of money?

4.What happens to the demand for money if the price level increases? Explain.

5.What happens to the demand for money if real output increases? Explain.

6.What happens to the demand for money if there are increases in financial technology, like ATMmachines or online banking? Explain.

7.Who sets the money supply in the United States?

8.Why is the money supply curve vertical?

9.Explain why the M1 money supply is not only made up of cash and currency.

Part 2 - Draw It-Draw a correctly labeled money market graph (liquidity preference model) and showwhat happens on the graph in each scenario. Label the initial nominal interest rate ir1.

10.There is an decrease in real GDP

11.The Fed increases the moneysupply

12.There is an increase in the inflation rate

13.The Fed decreases the money supply

Part 3 - Making Connections-Answer the following questions.

14.Explain how contractionary monetary policy reduces inflation.

15.What happens to investment spending when there is an increase in the money supply? Explain.

16.What might prevent borrowers from taking out loans even if the central bank lowers interest rates tozero?

Part 4 - Stretch Your Thinking-Use the following facts to answer the questions.

A.Between 2008 and 2018, the M1 money supply has increased from 1.5 trillion to 3.6 trillion

B.Between 2008 and 2018, the velocity of money decreased from 10.5 to 5.5

C.Since 2008, commercial banks have lent out less money and hold more excess reserves

D.Between 2009 and 2018, the unemployment rate in the US decreased from 10% to 4.1%

17.Which facts support the argument that the US will experience significant inflation in the future?Explain your reasoning.

18.Which facts support the argument that the US will experience mild inflation in the future? Explainyour reasoning.