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Money Demand and Risk: A Classroom Experiment

Author

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  • Bradley T. Ewing
  • Jamie B. Kruse
  • Mark A. Thompson

Abstract

The authors describe a classroom experiment that motivates student understanding of behavior toward risk and its effect on money demand. In this experiment, students are endowed with an income stream that they can allocate between a risk-free fund and a risky fund. Changes in volatility are represented by mean-preserving changes in the variance of the risky fund. When volatility of the risky fund increases, reallocating to the risk-free fund results in an increase in aggregate money demand. By responding to changes in volatility and then observing the aggregate response of their cohort, students gain a better understanding of the concept of money demand, portfolio allocation, and risk.

Suggested Citation

  • Bradley T. Ewing & Jamie B. Kruse & Mark A. Thompson, 2004. "Money Demand and Risk: A Classroom Experiment," The Journal of Economic Education, Taylor & Francis Journals, vol. 35(3), pages 243-250, July.
    • Handle: RePEc:taf:jeduce:v:35:y:2004:i:3:p:243-250
    DOI: 10.3200/JECE.35.3.243-250
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    Cited by:

    1. Donato Masciandaro, 2018. "Central Bank Digital Cash and Cryptocurrencies: Insights from a New Baumol–Friedman Demand for Money," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 51(4), pages 540-550, December.
    2. David T. Mitchell & Robert P. Rebelein & Patricia H. Schneider & Nicole B. Simpson & Eric Fisher, 2009. "A Classroom Experiment on Exchange Rate Determination with Purchasing Power Parity," The Journal of Economic Education, Taylor & Francis Journals, vol. 40(2), pages 150-165, April.
    3. Mitchell, David & Hunsader, Kenneth & Parker, Scott, 2011. "A Futures Trading Experiment: An Active Classroom Approach to Learning," MPRA Paper 56496, University Library of Munich, Germany, revised 2011.
    4. Emanuele Borgonovo & Stefano Caselli & Alessandra Cillo & Donato Masciandaro & Giovanno Rabitti, 2018. "Cryptocurrencies, central bank digital cash, traditional money: does privacy matter?," BAFFI CAREFIN Working Papers 1895, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
    5. Paul Johnson & Bart J. Wilson, 2008. "Economics Works! Experiments in High School Classrooms," Journal of Private Enterprise, The Association of Private Enterprise Education, vol. 23(Spring 20), pages 149-156.

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