1.Classify each of the following as related to the transactions demand, precautionary demand, or asset (speculative) demand for money. Explain:
(a) Rodrigo keeps $200 in cash in case of emergency.
(b) Kay moves her funds to a new bank that offers higher interest rates on bank accounts.
(c) Ned keeps most of his income in cash or in a zero-interest checking account.
2. Why would the money demand curve turn vertical when interest rates are very high and households are holding very small money balances?
3. If equilibrium real GDP is less than full employment real GDP, what should the Fed do
(a) About interest rates?
(b) The reserve requirement?
(c) With securities?