01 May Question: I’m working on a couple of questions on portfolio choice and these stood out to me. I need some h…
I’m working on a couple of questions on portfolio choice and these stood out to me. I need some help verifying my thoughts on these. Thanks!
1.) When payment technologies improve, what does the theory of portfolio choice predict will happen to money demand?
a.) increase
b.) decrease
c.) it depends on the technology
d.) no change
Note: I believe an improvement in payment technologies would lead to a decrease in money demand.
2.) According to the theory of portfolio choice, what would happen to money demand if wealth increases and inflation also increases substantially?
a.) higher money demand
b.) it is unclear
c.) lower money demand
d.) nothing, the two effects cancel each other
Note: I believe the answer could either be B or D. I know that increased wealth and increased inflation have the opposite effects on the demand for money, so I’m not sure whether this would lead to a cancelling of the effects, or something that is not totally clear with the amount of information given.
3.) When wealth rises, money demand is likely to ____; however, this effect is likely to be small because money is a dominated asset.
a.) increase
b.) decrease
c.) stay the same
Note: Increase seems correct to me here
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