1. We measure the opportunity cost of holding money with ________.

2. Money demand will________ (increase/decrease) as prices fall.

3. The principle of ________suggests that the demand for money should increase as prices increase.

4. The ________demand for money arises because individuals and businesses use money in ordinary business.

5. Checking Account Interest Rates. During the 1980s, banks started to pay interest (at low rates) on checking accounts for the first time. Given what you know about opportunity costs, how would interest paid on checking affect the demand for money?

6. Pegging Interest Rates. Suppose the Federal Reserve wanted to fix, or peg, the level of interest rates at 6 percent per year. Using a simple demand-and-supply graph, show how increases in money demand would change the supply of money if the Federal Reserve pursued he policy of this fixed interest rate. Use your answer to explain this statement: If the Federal Reserve pegs interest rates, it loses control of the money supply.

7. An ATM Next to Your Apartment Building. Suppose an ATM connected to your own bank is installed right next to your apartment building.

a. How will this affect the average amount of currency you carry around with you?

b. If you withdraw funds at your ATM only from your checking account, will your action have any effect on total money demand?

8. Flea Markets and the Demand for Money. People often like to visit flea markets to look for unexpected opportunities. Flea markets also typically use cash. Explain why this is an example of the liquidity demand for money.