Question 1

Jan's Dry Cleaning holds $10,000 in cash on a typical day, although only $2,000 is essential for carrying out business. Making a midday deposit is estimated to reduce cash holdings to $8,000 and cost an extra $80 per year in lost production. If, in addition, an armored car service is engaged to pick up cash more frequently for a fee of $120 per year, cash holdings will be further reduced to $6,000 per day. Employing a computerized cash management service for an annual fee of $180 would reduce cash holdings further to $4,000. If any reduction in cash holdings will be used to purchase government bonds earning 5 percent, then how much money should Jan's hold? Multiple Choice 0 $10,000 $8,000 $4,000 0 O $6,000 0 Based on the diagram, if potential output equals 8,000 and the real interest rate is 6 percent, then there is gap and the Fed must the real interest rate so that output will equal potential output. PAE Y = PAE Expenditure Line (r = 2%) Expenditure Line (r =4%) Expenditure Line (r = 6%) 45 4,000 8,000 10.000 Output Y Multiple Choice a recessionary; raise O a recessionary; reduce O no output; not changeRefer to the given figure where the nominal interest rate equals 6 percent and the money supply equals 600. Money Supgly MS Nominal Interest Rate (I) 109a 8% 2% Money Dam and MD 200 400 600 600 1000 Money lfthe Federal Reserve wants to lower the interest rate to 4 percent, it must the money supply to If the Federal Reserve wants to lower the interest rate to 4 percent, it must Multiple Choice O O O 0 increase; 800 decrease; 800 increase; 1,000 decrease; 400 the money supply to Multiple Choice O a recessionary; raise an expansionary; reduce no output; not change 000 an expansionary; raise Based on the diagram, if potential output equals 8,000 and the real interest rate is 2 percent, then there is gap and the Fed must the real interest rate so that output will equal potential output. PAE Y = PAE Expenditure Line (r = 2%) Expenditure Line (r =4%) Expenditure Line (r = 6%) 4.000 8,000 10,000 Output Y