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Chapter 20: Q 16. (page 547)

Consider the portfolio choice theory of money demand. How do you think the demand for money would be affected during a hyperinflation (i.e., monthly inflation rates in excess of 50%)?

Short Answer

Expert verified

The demand would decrease.

Step by step solution

01

Step 1. Define demand.

Demand relates to the quantity of a product that customers are interested in buying at varying prices over a set period of time.

02

Step 2. Explanation

Moneydemandwoulddecrease,butonlylittle.
Customers would prefer to have more reliable assets and, as a result, less money, since money is more volatile than other commodities.
Hyperinflation will also result in sky-high interest rates, lowering money demand.

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Most popular questions from this chapter

Wikipedia has a detailed account of hyperinflationary episodes in a number of countries throughout history. Go to the page at https://en.wikipedia.org/wiki/ Hyperinflation#Notable_hyperinflationary_episodes. Which of the countries listed had the worst hyperinflationary episode? Which country has the most recent hyperinflationary episode?

Why does the Keynesian view of the demand for money suggest that velocity is unpredictable?

Explain how the following events will affect the demand for money according to the portfolio theories of money demand:

a. The economy experiences a business cycle contraction

b. Brokerage fees decline, making bond transactions cheaper.

c. The stock market crashes. (Hint: Consider both the increase in stock price volatility following a market crash and the decrease in wealth of stockholders.)

John Maynard Keynes is among the most well-known economic theorists. Go to http://en.wikipedia.org/wiki/ John_Maynard_Keynes and write a one-page summary of his life and contributions.

Suppose a given country experienced low and stable inflation rates for quite some time, but then inflation picked up and over the past decade had been relatively high and quite unpredictable. Explain how this new inflationary environment would affect the demand for money according to portfolio theories of money demand. What would happen if the government decided to issue inflation-protected securities?
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