Question 1

If nominal GDP is $10 trillion, and the money supply is $2 trillion, velocity is

Accepted Answer

A)   0.2.
B)   5.
C)   10.
D)   20.E) A) and D)
F) A) and C)

Question 2

According to the quantity theory of money demand,

Accepted Answer

A)   an increase in interest rates will cause the demand for money to fall.
B)   a decrease in interest rates will cause the demand for money to increase.
C)   interest rates have no effect on the demand for money.
D)   an increase in money will cause the demand for money to fall.E) A) and B)
F) A) and C)

Question 3

The equation of exchange is

Accepted Answer

A)   M × P = V × Y.
B)   M + V = P + Y.
C)   M + Y = V + P.
D)   M × V = P × Y.E) None of the above
F) A) and B)

Question 4

In the Baumol-Tobin model, given that total costs for an individual equals  +  , where T0 = monthly income, b = brokerage costs, and C = amount raised from each bond transaction, derive the so-called square root rule.

Accepted Answer

An individual will minimize their costs....

Question 5

If the government finances its spending by selling bonds to the central bank, the monetary base will ________ and the money supply will ________.

Accepted Answer

A)   increase; increase
B)   increase; decrease
C)   decrease; decrease
D)   not change; not changeE) A) and B)
F) All of the above

Question 6

Starting in 1974, the conventional M1 money demand function began to

Accepted Answer

A)   severely underpredict the demand for money.
B)   severely overpredict the demand for money.
C)   predict more precisely the demand for money.
D)   do none of the above.E) A) and B)
F) A) and C)

Question 7

Researchers at the Federal Reserve found that M2 money demand functions performed ________ in the 1980s, with M2 velocity moving ________ with the opportunity cost of holding M2.

Accepted Answer

A)   poorly; erratically
B)   poorly; closely
C)   well; erratically
D)   well; closelyE) None of the above
F) B) and C)

Question 8

________ quantity theory of money suggests that the demand for money is purely a function of income, and interest rates have no effect on the demand for money.

Accepted Answer

A)   Keynes's
B)   Fisher's
C)   Friedman's
D)   Tobin'sE) None of the above
F) A) and C)

Question 9

In the late 1990s, M2 velocity ________, suggesting a ________ normal relationship between M2 and macroeconomic variables.

Accepted Answer

A)   stabilized; less
B)   stabilized; more
C)   slowed; less
D)   slowed; moreE) B) and D)
F) A) and B)

Question 10

The classical economists' conclusion that nominal income is determined by movements in the money supply rested on their belief that ________ could be treated as ________ in the short run.

Accepted Answer

A)   velocity; constant
B)   velocity; variable
C)   money; constant
D)   money; variableE) A) and B)
F) C) and D)

Question 11

If initially the money supply is $2 trillion, velocity is 5, the price level is 2, and real GDP is $5 trillion, a fall in the money supply to $1 trillion

Accepted Answer

A)   reduces real GDP to $2.5 trillion.
B)   causes velocity to rise to 10.
C)   decreases the price level to 1.
D)   decreases the price level to 1 and decreases velocity to 2.5.E) A) and D)
F) A) and B)

Question 12

Keynes hypothesized that the transactions component of money demand was primarily determined by the level of

Accepted Answer

A)   interest rates.
B)   velocity.
C)   income.
D)   stock market prices.E) All of the above
F) B) and C)

Question 13

The speculative demand for money may not exist because

Accepted Answer

A)   banks now pay interest on some types of checkable deposits.
B)   there are alternative riskless assets paying higher returns than the return on money.
C)   the transactions demand can be shown to depend on interest rates.
D)   government regulations have eliminated risk in the financial markets.E) A) and B)
F) A) and C)

Question 14

For the classical economists, the quantity theory of money provided an explanation of movements in the price level. Changes in the price level result

Accepted Answer

A)   from proportional changes in the quantity of money.
B)   primarily from changes in the quantity of money.
C)   only partially from changes in the quantity of money.
D)   from changes in factors other than the quantity of money.E) A) and B)
F) B) and C)

Question 15

The equation of exchange states that the quantity of money multiplied by the number of times this money is spent in a given year must equal

Accepted Answer

A)   nominal income.
B)   real income.
C)   real gross national product.
D)   velocity.E) All of the above
F) None of the above

Question 16

Keynes's liquidity preference theory indicates that the demand for money is

Accepted Answer

A)   constant.
B)   positively related to interest rates.
C)   negatively related to interest rates.
D)   negatively related to bond values.E) B) and C)
F) C) and D)

Question 17

The reason that economists are so interested in the stability of velocity is because if the demand for money is not stable, then steady growth of the money supply

Accepted Answer

A)   is going to promote price stability at the expense of low unemployment.
B)   is going to promote low unemployment at the expense of price stability.
C)   is an ineffective way to conduct monetary policy.
D)   can still be used to conduct monetary policy if the goal is price stability.E) A) and C)
F) None of the above

Question 18

If people expect nominal interest rates to be higher in the future, the expected return to bonds ________, and the demand for money ________.

Accepted Answer

A)   rises; increases
B)   rises; decreases
C)   falls; increases
D)   falls; decreasesE) None of the above
F) B) and D)

Question 19

If people expect nominal interest rates to be lower in the future, the expected return to bonds ________, and the demand for money ________.

Accepted Answer

A)   increases; increases
B)   increases; decreases
C)   decreases; increases
D)   decreases; decreasesE) C) and D)
F) None of the above

Question 20

Of the three motives for holding money suggested by Keynes, which did he believe to be the most sensitive to interest rates?

Accepted Answer

A)   The transactions motive.
B)   The precautionary motive.
C)   The speculative motive.
D)   The altruistic motive.E) A) and B)
F) A) and C)

Exam 22: Quantity Theory, Inflation, and the Demand for Money

If the government finances its spending by selling bonds to the central bank, the monetary base will ________ and the money supply will ________.

Correct AnswerverifiedShow Answer

The classical economists' conclusion that nominal income is determined by movements in the money supply rested on their belief that ________ could be treated as ________ in the short run.

Correct AnswerverifiedShow Answer

If initially the money supply is $2 trillion, velocity is 5, the price level is 2, and real GDP is $5 trillion, a fall in the money supply to $1 trillion

Correct AnswerverifiedShow Answer

Researchers at the Federal Reserve found that M2 money demand functions performed ________ in the 1980s, with M2 velocity moving ________ with the opportunity cost of holding M2.

Correct AnswerverifiedShow Answer

The reason that economists are so interested in the stability of velocity is because if the demand for money is not stable, then steady growth of the money supply

Correct AnswerverifiedShow Answer

The speculative demand for money may not exist because

Correct AnswerverifiedShow Answer

Keynes's liquidity preference theory indicates that the demand for money is

Correct AnswerverifiedShow Answer

Keynes hypothesized that the transactions component of money demand was primarily determined by the level of

Correct AnswerverifiedShow Answer

Starting in 1974, the conventional M1 money demand function began to

Correct AnswerverifiedShow Answer

For the classical economists, the quantity theory of money provided an explanation of movements in the price level. Changes in the price level result

Correct AnswerverifiedShow Answer

If people expect nominal interest rates to be lower in the future, the expected return to bonds ________, and the demand for money ________.

Correct AnswerverifiedShow Answer

If nominal GDP is $10 trillion, and the money supply is $2 trillion, velocity is

Correct AnswerverifiedShow Answer

According to the quantity theory of money demand,

Correct AnswerverifiedShow Answer

In the late 1990s, M2 velocity ________, suggesting a ________ normal relationship between M2 and macroeconomic variables.

Correct AnswerverifiedShow Answer

In the Baumol-Tobin model, given that total costs for an individual equals + , where T0 = monthly income, b = brokerage costs, and C = amount raised from each bond transaction, derive the so-called square root rule.

Correct AnswerverifiedAn individual will minimize their costs....View AnswerShow Answer

The equation of exchange states that the quantity of money multiplied by the number of times this money is spent in a given year must equal

Correct AnswerverifiedShow Answer

If people expect nominal interest rates to be higher in the future, the expected return to bonds ________, and the demand for money ________.

Correct AnswerverifiedShow Answer

Of the three motives for holding money suggested by Keynes, which did he believe to be the most sensitive to interest rates?

Correct AnswerverifiedShow Answer

The equation of exchange is

Correct AnswerverifiedShow Answer

________ quantity theory of money suggests that the demand for money is purely a function of income, and interest rates have no effect on the demand for money.

Correct AnswerverifiedShow Answer

If the government finances its spending by selling bonds to the central bank, the monetary base will and the money supply will .

Correct Answer
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The classical economists' conclusion that nominal income is determined by movements in the money supply rested on their belief that could be treated as in the short run.

Correct Answer
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Correct Answer
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Researchers at the Federal Reserve found that M2 money demand functions performed in the 1980s, with M2 velocity moving with the opportunity cost of holding M2.

Correct Answer
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Correct Answer
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Correct Answer
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If people expect nominal interest rates to be lower in the future, the expected return to bonds , and the demand for money .

Correct Answer
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Correct Answer
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Correct Answer
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In the late 1990s, M2 velocity , suggesting a normal relationship between M2 and macroeconomic variables.

Correct Answer
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In the Baumol-Tobin model, given that total costs for an individual equals + , where T₀ = monthly income, b = brokerage costs, and C = amount raised from each bond transaction, derive the so-called square root rule.

Correct Answer
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An individual will minimize their costs....
View Answer

Correct Answer
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If people expect nominal interest rates to be higher in the future, the expected return to bonds , and the demand for money .

Correct Answer
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Correct Answer
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Correct Answer
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