FORM 5 NSS ECONOMICS

MONEY DEMAND AND MONEY MARKET EQUILIBRIUM

MONEY DEMAND (Reprint)
90 AL
1. Interest rate
Ma0 Ma1

Asset demand for money

(Revised) Which of the following correctly explains the rightward shift of the asset
demand function from Ma0 to Ma1?

A. a rise in the interest rate

B. an increase in the sale of government bonds
C. a rise in the risk of holding bonds
D. None of the above

91 AL
1. Interest rate
Ma0 Ma1

Asset demand for money

(91.15) Which of the following correctly explains the shift of asset demand for money
curve from Ma0 to Ma1?
(1) a fall in the interest rate
(2) a preference for higher liquidity
(3) a widespread use of credit cards
(4) expectations of a fall in bond prices
A. (1) and (2) only
B. (1) and (3) only
C. (2) and (4) only
D. (3) and (4) only

FORM 5 NSS ECON – MONEY DEMAND & MONEY MARKET EQUILIBRIUM 1

93 AL

1. (93.28) (Revised) Which of the following about money demand is NOT true?

A. It is positively related with wealth.

B. It is positively related with the real rate of interest.
C. It is positively related with income.
D. None of the above.

95 AL
1. Interest rate
M0 M1

Total demand for money

(95.14) Refer to the above diagram. Which of the following correctly explains the
shift of the total demand for money curve from M0 to M1?

A. a fall in the interest rate

B. a rise in national income
C. expectations of a rise in bond prices
D. a purchase of bonds by the government in the open market

97 AL

1. (97.06) Which of the following will increase the demand for money?
(1) Credit cards are more commonly used.
(2) There is an increase in income.
(3) There is a fall in the interest rate.
(4) The bond prices fall.

A. (1) and (3) only

B. (1) and (4) only
C. (2) and (3) only
D. (2) and (4) only

FORM 5 NSS ECON – MONEY DEMAND & MONEY MARKET EQUILIBRIUM 2

2001 AL

1. Interest rate
M2 M1

Total demand for money

(01.22) Refer to the above diagram. Which of the following can explain the shift of
the total demand for money curve from M1 to M2?
(1) a rise in the interest rate
(2) more shops accepting the Easy Pay System (EPS) payment method
(3) a fall in the national income

A. (1) and (2) only

B. (1) and (3) only
C. (2) and (3) only
D. (1), (2) and (3)

2. (01.17) If there is a decrease in investment, equilibrium income will __________ and

the amount of money held for transaction purposes will ___________.

A. decrease … decrease
B. decrease … remain constant
C. increase … decrease
D. remain constant … remain constant

2004 AL

1. (04.22) Money is superior to other financial assets because it is

A. more liquid.
B. widely accepted as a medium of exchange.
C. generally more stable in value.
D. All of the above.

FORM 5 NSS ECON – MONEY DEMAND & MONEY MARKET EQUILIBRIUM 3

2005 AL
1. (05.15) Which of the following can explain the rightward shift of the total demand for
money curve?

A. more extensive use of credit cards

B. an increase in the velocity of circulation of money
C. a fall in interest rate
D. higher risk of holding bonds

2008 AL
1. (08.20) Refer to the following diagram.
Interest rate

Ma1

Ma0
Money

The asset demand for money will shift from Ma0 to Ma1 when
A. income increases.
B. the interest rate decreases.
C. the general price level increases.
D. the interest rate is expected to increase.

2009 AL
1. (09.15) Which of the following statements about money demand is true?
(1) Transaction demand for money tends to be more stable than asset demand for
money.
(2) The shorter the time interval between wage receipts, the higher the transaction
demand for money.
(3) The higher the volatility of the financial market, the higher the asset demand for
money.
A. (1) and (2) only
B. (1) and (3) only
C. (2) and (3) only
D. (1), (2) and (3)
FORM 5 NSS ECON – MONEY DEMAND & MONEY MARKET EQUILIBRIUM 4
2010 AL

1. (10.16) A fall in the market interest rate implies a ___________ in bond prices, then
people will tend to hold ___________ bonds and asset demand for money will
___________.

A. rise … fewer .. rise

B. fall … more … rise
C. rise … fewer … fall
D. fall … more … fall

Practice paper

1. (PP.25) Which of the following can explain a leftward shift of the money demand
curve?

A. a rise in the interest rate

B. an increase in income of households
C. a more widespread use of Octopus cards
D. an increase in the required reserve ratio

2. (PP.30) The real value of money decreases when the _____________ is rising.

A. deflation rate
B. general price level
C. money demand
D. nominal interest rate

FORM 5 NSS ECON – MONEY DEMAND & MONEY MARKET EQUILIBRIUM 5

2013 DSE
1. (13.27) Refer to the following diagram.
Nominal interest rate

D2
D1 Quantity of money

Which of the following will cause the money demand curve to shift from D1 to D2?
A. A fall in the nominal interest rate
B. a rise in national income
C. more widespread use of electronic money
D. an open market purchase of bonds by the central bank

2. (13.30) If there is a decrease in the desire to consume, the net exports of an economy
will _______ and the amount of money held for transaction purposes will ______.

A. decrease … decrease
B. decrease … remain constant
C. increase … increase
D. increase … decrease

2015 DSE

1. (15.28) Refer to the following diagram.

Interest rate

Ma2
Ma1 Quantity of money

The curve of asset demand for money will shift from Ma1 to Ma2 when
A. the risk of investing in the stock market increases.
B. the interest rate decreases.
C. the general price level rises.
D. the government reduces the income tax rate.
FORM 5 NSS ECON – MONEY DEMAND & MONEY MARKET EQUILIBRIUM 6
2016 DSE
1. (16.29) Refer to the following diagram.
Interest rate(%)

Ma0
Ma1
0 Quantity of money
Which of the following would lead to the above change in the asset demand for money
curve?
A. The stock market becomes less volatile.
B. The general price level is expected to fall continuously.
C. The central bank raises the discount rate.
D. There is a fall in disposable income of households.

2017 DSE

1. (17.30)Electronic payment systems allow customers to pay without cash. ApplePay,

Visa payWave and MasterCard paypass are some of the examples.

When more shops accept these electronic payment systems as a method of payment,
(1) their cost of handling coins and notes will fall.
(2) the actual banking multiplier may increase.
(3) transactions demand for money will increase.

A. (1) and (2) only

B. (1) and (3) only
C. (2) and (3) only
D. (1), (2) and (3)

FORM 5 NSS ECON – MONEY DEMAND & MONEY MARKET EQUILIBRIUM 7

2018 DSE

1. (18.29) Nominal interest rate

Md1 Md0
Quantity of money
Which of the following would result in the above change in money demand?

A. The central bank issues larger denomination banknotes for circulation.

B. The expected inflation rate drops.
C. The risk of investing in stock market decreases.
D. Security problems have been found in the major electronic payment system.

2020 DSE

1. (20.28) The following diagram shows the asset demand for money of an economy.
Nominal interest rate (%)

MA0
MA1
0 Quantity of money

Which of the following will cause the above change in asset demand for money?
A. The nominal interest rate increases.
B. There is a contraction of monetary base.
C. The use of electronic wallets such as Alipay becomes more popular.
D. The expected rate of return of holding bonds increases.

FORM 5 NSS ECON – MONEY DEMAND & MONEY MARKET EQUILIBRIUM 8

Money demand
AL DSE
90 # 1C 05 # 1D PP # 1C, 2B
91 #1C 08 # 1D 2013 # 1B, 2D
93 # 1B 09 # 1B 2015 # 1A, 2A
95 # 1B 10 # 1A 2016 # 1A
97 # 1C 2017 # 1A
01 # 1C, 2A 2018 # 1C
04 # 1D 2020 # 1D
11 # 1D

FORM 5 NSS ECON – MONEY DEMAND & MONEY MARKET EQUILIBRIUM 9

COST OF HOLDING MONEY
92 AL
1. (92.21) If the nominal rate of interest is 10% but the real rate of interest is only 6%,
the real return on holding cash will be

A. 0%.
B. - 4%.
C. - 6%.
D. - 10%.

96 AL

1. (96.21) When inflation occurs, the opportunity cost of holding money is equal to

A. the nominal rate of interest.

B. the expected rate of inflation.
C. the actual rate of inflation.
D. None of the above.

99 AL

1. (99.18) The expected inflation rate and the real rate of interest are 10% and 4%
respectively. If the actual inflation rate turns out to be 9% only, the cost of holding
cash is ___________ and the real rate of return on holding cash is ___________.

A. 4%…-5%
B. 4%…-9%
C. 14%…-9%
D. 14%…-10%

2002 AL

1. (02.22) The nominal interest rate and the expected inflation rate are 10% and 7%
respectively. If the actual inflation rate turns to be 12%, then the realized real rate of
interest will be ________ and the real rate of return on holding cash will be _______.

A. – 2% …– 12%
B. – 2% …– 10%
C. 3% …– 12%
D. 3% …– 10%
FORM 5 NSS ECON – MONEY DEMAND & MONEY MARKET EQUILIBRIUM 10
2003 AL

1. (03.21) The real rate of return on holding non-interest-earning cash is positive if

A. the rate of inflation is falling.

B. the interest rate is falling.
C. prices are falling.
D. the velocity of circulation of money is falling.

2004 AL

1. (04.18) Suppose individuals can only choose to hold bonds or cash. The costs of
holding cash is

A. the real interest rate because the return from holding bonds will not be affected
by a change in the price level.
B. the real interest rate because it reflects the rate of return from investment.
C. the nominal interest rate because it is the return from bonds.
D. the nominal interest rate only when inflation rate can be accurately anticipated.

2010 AL
1. (10.19) Suppose the nominal interest rate on a one-year bond is 3% and the expected
deflation rate is 2%. However, the general price level turns out to rise by 3%. The
nominal rate of return and the actual real rate of return of holding the bond are
________ and ________ respectively.
A. 3% … 5%
B. 3% … 0%
C. 0% … 5%
D. 0% … 0%

2011 AL

1. (11.18) Suppose the market rate of interest is 5% and the expected inflation rate is 3%.
The opportunity cost of holding money is ______, and the real rate of return on
holding money is ______.

A. -5% … 2%
B. 2% … -3%
C. 5% … 3%
D. 5% … -3%
FORM 5 NSS ECON – MONEY DEMAND & MONEY MARKET EQUILIBRIUM 11
2012 AL

1. (12.21) The nominal interest rate and the expected inflation rate are 8% and 5%
respectively. If the actual inflation rate is 10%, the real rate of return on holding cash
will be ____.
A. -10%
B. -8%
C. -5%
D. -3%

Sample paper

1. (SP.28) If the nominal interest rate on one-year bond is 10% and the expected inflation
rate is 2%, the nominal rate of return and the expected cost of holding cash are
_____________ and ___________ respectively.

A. 0% … 8%
B. 0% …10%
C. –2% ….8%
D. –10% … 10%

Practice paper

1. (PP.35) When the nominal interest rate is higher than the real interest rate, the
expected inflation rate must be _____________.

A. positive
B. negative
C. rising
D. falling

2014 DSE

1. (14.32) The nominal interest rate of a one-year bond and the expected inflation rate
are 8% and 3% respectively. If the actual inflation rate is 6%, then the actual real
interest rate is ______ and the actual rate of return of holding cash is ______.
A. 2% ...... -6%
B. 2% ...... -8%
C. 5% ...... -6%
D. 5% ...... -8%
FORM 5 NSS ECON – MONEY DEMAND & MONEY MARKET EQUILIBRIUM 12
2015 DSE

1. (15.31) If the nominal interest rate is 5% and the expected inflation rate is 3%, the
cost of holding money is ______, the nominal return of holding money is ______ and
the expected real interest rate is ______.

A. 5%...-3%...2%
B. 5%...0%...2%
C. 8%...-3%...3%
D. 8%...0%...3%

2018 DSE

1. (18.34) Assume that the real interest rate is 6% and the expected inflation rate is 3%.
If the actual inflation rate is 5%, the cost of holding money will be ____________.

A. 4%
B. 6%
C. 9%
D. 11%

2019 DSE

1. (19.32) In times of inflation, suppose the nominal interest rate of a bond is higher than
the expected inflation rate. If the actual inflation rate turns out to be higher than the
expected inflation rate,

(1) The actual inflation rate will be higher than the nominal interest rate of the
bond.
(2) The expected real rate of return of the bond will be greater than the actual real
rate of return.
(3) The actual real rate of return of the bond may be negative.
(4) The real rate of return of holding cash will be higher than zero.

A. (1) and (2) only

B. (1) and (4) only
C. (2) and (3) only
D. (3) and (4) only

FORM 5 NSS ECON – MONEY DEMAND & MONEY MARKET EQUILIBRIUM 13

2021 DSE

1. (21.34) Suppose the actual inflation rate and the nominal interest rate are -1% and 3%
respectively. Which of the following statements are correct?
(1) The cost of holding cash is 3%.
(2) The expected real interest rate is higher than the nominal interest rate.
(3) The actual real rate of return on holding cash is 1%.

A. (1) and (2) only

B. (1) and (3) only
C. (2) and (3) only
D. (1), (2) and (3)

2022 DSE

1. (22.35) The nominal interest rate on a one-year deposit is 1% and the inflation rate is
3%. The cost of holding cash is _____________ and the real rate of return of holding
cash is ____________.

A. 1% … -3%
B. 1% … -2%
C. 3% … -3%
D. 3% … -2%

Cost of holding money

AL DSE
92 # 1B SP # 1B
96 # 1A PP # 1A
99 # 1C 2014 DSE # 1A
02 # 1A 2015 DSE # 1B
03 # 1C 2018 DSE # 1C
04 # 1C 2019 DSE # 1C
10 # 1B 2021 DSE # 1B
11 # 1D 2022 DSE # 1
12 # 1A

FORM 5 NSS ECON – MONEY DEMAND & MONEY MARKET EQUILIBRIUM 14

 FORM 5 NSS ECONOMICS
MONEY DEMAND AND MONEY MARKET EQUILIBRIUM
2003 AL

4. Money is commonly believed to be the most liquid and perhaps the safest asset on
Earth.
(a) What is meant by liquidity? (2m)

(b) Explain why money is not necessarily a 100% risk-free asset. (4m)

(c) Why are people willing to holding money even though its expected rate of return
is lower than that of other assets (such as bonds and stocks)? (4m)

Sample paper

6. (a) (i) What is the difference between nominal and real interest rates? (2m)

(ii) Explain under what condition the nominal interest rate would be lower than
the real interest rate. (2m)

(b) Explain why the nominal interest rate is the cost of holding money. (3m)

2012 DSE

11. To relieve the effect of inflation on citizens, the government has issued
inflation-linked bonds (ibonds) with interest paid to bondholders every six months.
The interest rate is positively related to the actual inflation rate of the last half-year
period.
(c) What is the opportunity cost of holding cash instead of ibonds? (2m)

2013 DSE
3.
(a) What is the relationship between nominal interest rate and real interest rate? (2m)

(b) “When there is actual deflation, the nominal interest rate will be lower than the real
interest rate.” Do you agree? Explain. (3m)

2020 DSE

1. (20.05) (a) What is the opportunity cost of holding money? Explain. (2m)
FORM 5 NSS ECON – MONEY DEMAND & MONEY MARKET EQUILIBRIUM 15
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FORM 5 NSS ECON – MONEY DEMAND & MONEY MARKET EQUILIBRIUM 16