Please state whether each of the following claims are True, False or Uncertain, and explain briefly.
1. "The term investment, as used by economists, refers to the purchase of bonds and shares of stock." [
2. "The demand for money does not depend on the interest rate because only bonds earn interest."
3. "Bond prices and interest rates always move in opposite directions" [
4. “An increase in government spending leads to a decrease in investment.” []
5. “If government spending and taxes increase by the same amount, the IS curve does not shift.” [
II. IS-LM Model
1. Suppose that a person’s yearly income is $60,000. Also, suppose that this person’s money demand function is given by
Md=$Y(.35-i)
a. What is this person’s demand for money when the interest rate is 5%? 10%? [
b. Explain how the interest rate affects money demand.
c. Suppose that the interest rate is 10%. In percentage terms, what happens to this person’s demand for money if her yearly income is reduced by 50%?
d. Suppose that the interest rate is 5%. In percentage terms, what happens to this person’s demand for money if her yearly income is reduced by 50%?[
e. Summarize the effect of income on money demand. In percentage terms, how does this effect depend on the interest rate?