Keynesian Liquidity Preference Theory and Its Relevance to the Caribbean Region•Outline the main concepts of the Liquidity Preference Theory proposed by John Maynard Keynes and discuss its applicability to the Caribbean region.•Discuss the short-term approach to interest rate determination in the Caribbean and factors influencing liquidity preference.•Examine the motives for holding money according to the Liquidity Preference Theory and their impact on interest rates in the Caribbean.
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Keynesian Liquidity Preference Theory and Its Relevance to the Caribbean Region
•Outline the main concepts of the Liquidity Preference Theory proposed by John Maynard Keynes and discuss its applicability to the Caribbean region.
•Discuss the short-term approach to interest rate determination in the Caribbean and factors influencing liquidity preference.
•Examine the motives for holding money according to the Liquidity Preference Theory and their impact on interest rates in the Caribbean.
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- Question: What is the Liquidity Preference Theory, and how does it explain the relationship between interest rates and the demand for money? A) The Liquidity Preference Theory has no relevance to interest rates or the demand for money. B) The Liquidity Preference Theory posits that individuals and businesses hold money for transactional, precautionary, and speculative reasons. It suggests that as interest rates rise, the demand for money decreases because holding money becomes less attractive compared to interest-bearing assets. C) The Liquidity Preference Theory suggests that interest rates have no impact on the demand for money. D) The Liquidity Preference Theory argues for always keeping cash reserves.Question 5 Consider a scenario where the Bank of England views the UK economy to be overheating and is attempting to slow the economy down using monetary policy. Which of the following statements is correct regarding the effects of an interest rate rise? (select all correct answers) Choose at least one correct answer It leads to higher demand for GBP, which results in an appreciation of GBP. An interest rate rise does lead to higher demand for UK bonds, but due to their lower prices. It leads to higher bond prices, which result in higher demand for UK bonds. Cheaper imports mean higher leakage. This reduces aggregate demand. It has opposing effects to the UK's aggregate demand (AD) of discouraging investment, which lowers AD, and cheaper Imports, which boosts AD.Which one of the following statements regarding the demand for money is correct? (a) A positive relationship exists between the quantity of money demanded and the prevailing interest rate in an economy; (b) The demand for money is made up of the sum of all the money balances that participants in the economy would like to have; (c) For a given interest rate, an increase in nominal income increases the demand for money; (d) Two key factors that impact on the demand for money by individuals are savings and investments available to participants.
- Question 6 Indicate whether each view follows the traditional (neoclassical) view of money, banking, and capitalist economies, or the (post)Keynesian view. Question 6 options: Money precedes production Production precedes money The level of investment depends most significantly on expectations ('animal spirits') Loans create the money necessary to invest, and therefore to produce and generate an income to deposit into banks. (loans create deposits) Deposits into banks create the funds that get loaned out. (deposits create loans) The level of investment depends most significantly on the interest rate Money developed through rational, private actors in an attempt to economize on transaction costs 1. Traditional (neoclassical) 2. (Post) Keynesian(Q#3) There is an improvement in the interest returns that can be earned from long term Bank CD's. Moreover, the stock market and real estate markets have strengthened and are expected to continue to rise in value providing strong investment returns. Note: consider the desire to hold financial wealth in the form of money balances that very little interest: (a) the quantity of money balances demanded will increase (b) the quantity of money balances demanded will decrease (Q#4) Banks have become much less strict about issuing new credit cards. They are issuing far more cards, with lower rates and more generous credit limits. First predict how this will impact the demand for money balances. The expansion of credit cards will end up:Discuss briefly the liquidity preference theory (LFT) and differentiate it from the loanable funds (classical) model of interest rate determination. Differentiate the equation of demand for real money balances in the Keynesian model based on the LFT from the equation of demand for real money balances in the classical model based on the quantity theory of money, by providing their respective money demand equations.
- Consider the same economy as in the previous question with the supply of money fixed at $2000. Now suppose there is a shift in the money demand equation such that households in aggregate desire to hold an additional $150 in cash balances for any given level of interest rates. (a) Calculate the effect this has on the equilibrium interest rate (to two decimal places). (b) What would the central bank have to do to offset this effect?Economics Direct answer, no explanation required. What interest rate essentially serves as the ceiling on how high the federal funds rate can go? What policy has recently been used in Europe and Japan to help central banks get around the constraints of the zero bound? When the Fed provides information designed to help condition long-term expectations of future interest rates it is said to be engaging in what? The problem of time inconsistency highlights why it is important for a central bank to use when conducting monetary policy. Which of the following fills in this blank: discretion; multiple targets; secrecy; a rule.Question 7 (i) List and explain briefly the three reasons for holding money according to Keynesian analysis. (ii) List and briefly explain the functions of money. (iii)Briefly discuss the relationship between the demand for money and the following three variables. (a) The general level of prices (b) The level of real income (c) The nominal rate of interest
- 9) Consider a credit boom where bank lending increases a) What is likely to happen to the money supply? Explain. b) Explain whether such a boom would more likely be inflationary or deflationary. c) Given your answer from (b), would borrowers or lenders more likely benefit?Explain the micro factors and macro factors which affect the cost of money? What are the conclusions of Beta stability tests and Tests based on the slope of the SML? (hint: refer to Ch 25 in the textbook) Suppose Asset A has an expected return of 10 percent and a standard deviation of 20 percent. Asset B has an expected return of 16 percent and a standard deviation of 40 percent. If the correlation between A and B is 0.35, what are the expected return and standard deviation for a portfolio comprised of 40 percent Asset A and 60 percent Asset B? 1) Calculate what is called Beta, , from the table below (hint : use excel for calculation for beta) and then 2) make the equation with beta and intercept to calculate the expected return of i asset. (hint; use SML equation in Chapter 25 and rRF=5%, M =9% ) Year M i 1 16% 19% 2 -6% -11% 3 12% 17% 4 14% 19% Calculate the expected return of portfolio and standard deviation of portfolio…Q2-20 Other things equal, if the demand for money becomes more elastic, then the LM curve will become _______.In other words, a given rise in the interest rate will, in order for money market equilibrium to be preserved, be associated with a ________ rise in income. Select one: a. less elastic / smaller b. less elastic / larger c. more elastic / smaller d. more elastic / larger