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Author Question: Why is the demand for real money balances related to the nominal interest rate, rather than the real ... (Read 122 times)

karateprodigy

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on: Jun 30, 2018
Why is the demand for real money balances related to the nominal interest rate, rather than the real interest rate?
 
  What will be an ideal response?

Question 2

In addition to the chairman of the Board of Governors, the FOMC consists of ________.
 
  A) six rotating members of the Board of Governors and five presidents of Federal Reserve banks
  B) six other members of the Board of Governors, four rotating bank presidents and the president of the New York Federal Reserve
  C) six other members of the Board of Governors and five presidents of Federal Reserve banks; all twelve rotating members
  D) twelve Federal Reserve Bank presidents
  E) none of the above


shoemake

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Reply #1 on: Jun 30, 2018
Answer to Question 1

Because expected inflation is irrelevant to deciding between money versus interest-bearing assets. Whether expected inflation is high or low, interest-bearing assets generate income at the nominal interest rate, and that income is the opportunity cost of holding money. Expected inflation implies a reduction in the purchasing power of money affecting equally both money held and money received as interest income.

Answer to Question 2

B


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