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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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