Deck 20: Money Demand

Question 1

In Keynes's view, income affects money demand for both precautionary and speculative reasons.

Answer 1

False

Question 2

Interest rates and the speculative demand for money are inversely related.

Answer 2

True

Question 3

According to Friedman's model, an increase in the yield on bonds increases the demand for money, .

Answer 3

False

Question 4

A great uncle you did not know existed leaves you $100,000 in his will. Keynes would predict that the transactions demand for money will increase.

Question 5

The precautionary motive of holding money implies that money demand falls with a decrease in interest rates.

Question 6

When interest rates are low, people expect them to rise.

Question 7

The quantity equation of money supply is not true if velocity is not constant.

Question 8

Baumol and Tobin discussed how interest rates are inversely related to the transactions demand for money.

Question 9

According to the Friedman theory, if the difference between the return on stocks and money rises, the demand for real money balances will rise.

Question 10

In Friedman's theory, the return on money varies and increases above zero.

Question 11

In Friedman's view, velocity follows a random walk.

Question 12

Income has an impact on money demand in both Keynes's and Friedman's approach to money demand.

Question 13

Velocity is the number of times a year a unit of currency is used for transactions.

Question 14

Strictly speaking, the supply of money increases with interest rates, since banks lend more at higher rates.

Question 15

Interest rates have a larger impact on money demand in Keynes's view compared to Friedman's.

Question 16

In Keynes's theory of money demand, interest rates have opposite effects on precautionary and speculative demand for money.

Question 17

According to the Friedman theory, if the difference between expected inflation and the return on money falls, the demand for money will rise.

Question 18

MV/P is a measure of real GDP.

Question 19

The theory of the demand for money described originally by Friedman is often called the liquidity preference theory.

Question 20

If the price level rises, the demand for real money balances rises.

Question 21

According to Friedman, the returns on stocks and money tend to move in opposite directions.

Question 22

According to William Baumol and James Tobin, the precautionary demand for money is _____ related to interest rates, and the speculative demand for money is _____ related to interest rates.

A) positively, positively
B) positively, negatively
C) negatively, positively
D) negatively, negatively

Question 23

Baumol and Tobin discuss how a(n) _____ in interest rates can decrease the _____ demand for money.

A) increase, transactions
B) decrease, transactions
C) increase, speculative
D) decrease, precautionary

Question 24

People holding money in case they need to fix their car is an example of

A) money demand for transactions.
B) precautionary demand.
C) speculative demand.
D) none of the above.

Question 25

If bond yields rise by 1% and the return on money rises by 1%, the predictions for the change in money demand made by Keynes's and Friedman's models are the same.

Question 26

The use of efficient payment systems like electronic fund transfer in the United States led to an increase in the velocity of money.

Question 27

During the period 1790-1834, the velocity of dollars rose as the U.S. government paid off its debt.

Question 28

People holding money in anticipation that bond yields will rise is an example of

A) money demand for transactions.
B) precautionary demand.
C) speculative demand.
D) none of the above.

Question 29

In Keynes's model, a(n) _____ in interest rates can decrease the _____ demand for money.

A) increase, transactions
B) decrease, transactions
C) increase, speculative
D) decrease, speculative

Question 30

The stability of velocity broke down in the 1970s.

Question 31

The yield and expected return on a bond are the same if the bond is held to maturity.

Question 32

According to both Keynes and Friedman, the demand for money decreases with a decrease in

A) permanent income.
B) the interest rate.
C) the spread between the interest rates on bonds and money.
D) the return on bonds minus the return on money.

Question 33

Before 1970, the quantity of money in circulation moved closely with nominal GDP.

Question 34

Higher national debt leads to higher velocity, since bonds serve as a substitute for money for some purposes.

Question 35

If the return on stocks falls by 2% and the return on money falls by 2%, the predictions of Keynes's and Friedman's models of money demand would be the same, .

Question 36

With the increasing use of online payments systems, velocity is expected to fall in the future.

Question 37

Credit cards could be one reason that velocity is higher today than a few decades ago.

Question 38

Now that Keynes's and Friedman's models have been shown to be insufficient explanations of money demand, the quantity theory has returned as the dominant model.

Question 39

Friedman's theory of money demand is more complex than Keynes's.

Question 40

Central banks have no influence during a liquidity trap.

Question 41

According to Keynes, an increase in interest rates causes _____ in velocity, ceteris paribus.

A) an increase
B) a decrease
C) no change
D) cannot be determined

Question 42

One determinant of money demand that Friedman considers but Keynes does not is

A) the return on money.
B) the return on stocks.
C) the yield on bonds.
D) all of the above.

Question 43

According to Friedman, a decrease in expected inflation would not affect the demand for money if the _____ fell by the same amount.

A) return on stocks
B) return on bonds
C) return on money
D) none of the above

Question 44

Which of the following is equivalent to velocity?

A) MV/PY
B) YP/M
C) MP/Y
D) none of the above

Question 45

Money demand became more sensitive to changes in interest rates starting in the

A) 1970s.
B) 1980s.
C) 1990s.
D) 2000s.

Question 46

Velocity was notably unstable starting in the

A) 1920s.
B) 1940s.
C) 1960s.
D) none of the above.

Question 47

In the 19970s, what became harder to predict?

A) velocity
B) output
C) inflation
D) all of the above

Question 48

According to Friedman, an increase in interest rates causes _____ in velocity, ceteris paribus.

A) an increase
B) a decrease
C) no change
D) cannot be determined

Question 49

According to whose model does velocity change with interest rates?

A) Friedman
B) Keynes
C) both of the above
D) neither of the above

Question 50

One determinant of money demand that Friedman considers but Keynes does not is

A) output.
B) the return on stocks.
C) the unemployment rate.
D) none of the above.

Question 51

A liquidity trap occurs when

A) money demand falls.
B) inflation is zero.
C) nominal interest rates are zero.
D) all of the above.

Question 52

According to _____ model, changes in income affect the demand for money.

A) Friedman's
B) Tobin's
C) Baumol's
D) Hamilton's

Question 53

Which of the following is a difference between Keynes liquidity preference theory and the modern quantity theory of money?

A) The modern quantity theory of money specifies 1 asset instead of 3 assets like the liquidity preference theory.
B) The liquidity preference theory assumes the return on money to be 1, unlike the modern quantity theory of money.
C) The liquidity preference theory assumes velocity to be constant, unlike the modern quantity theory of money.
D) The modern quantity theory predicts that interest rate changes have little effect on money demand unlike the liquidity preference theory.

Question 54

Which of the following could explain an increase in velocity?

A) credit cards
B) wire transfers
C) cash management accounts
D) all of the above

Question 55

According to Keynes, income affects the _____ demand for money.

A) precautionary
B) speculative
C) financial
D) none of the above

Question 56

Velocity was notably unstable starting in the

A) 1930s.
B) 1940s.
C) 1950s.
D) none of the above.

Question 57

According to Friedman, an increase in expected inflation causes the demand for money to _____, ceteris paribus.

A) increase
B) decrease
C) stay the same
D) cannot be determined

Question 58

According to whose model does expected inflation tend to move with the return on money?

A) Friedman
B) Keynes
C) both of the above
D) neither of the above

Question 59

If a central bank does not have full control of the supply of money, supply is ____ on a graph of the supply and demand for money.

A) upward sloping
B) downward sloping
C) vertical
D) horizontal

Question 60

In the 1990s, the volatility of velocity was _____ when compared with the 1960s.

A) more persistent
B) more predictable
C) lower
D) all of the above

Question 61

How does a falling interest rate affect speculative demand?

Question 62

According to Friedman's theory, how would money demand change during the stock market bubble and collapse?

Question 63

According to Keynes, income affects money demand through what two motivations?

Question 64

Solve the quantity equation for money demand to find an expression for velocity. Explain the meaning of velocity using your equation.

Question 65

What are the three motivations, identified by Keynes, for holding money?

Question 66

What is the velocity of a dollar?

Question 67

Write the quantity equation for money identifying all the variables.

Question 68

What happened during the 1970s that caused Friedman's monetary theory to crack?

Question 69

If the yields (and expected return) on bonds fall, what else would be necessary for Friedman's and Keynes's theories of money demand to have the same qualitative prediction?

Question 70

A lump sum tax cut gives taxpayers a one-time reduction. Why would such policy imply a greater change in money demand in Keynes's framework than Friedman's?

Question 71

What are the differences between the modern quantity theory of money and Keynes' liquidity preference theory?

Question 72

According to Friedman's model, what is the one factor directly related to money demand?

Question 73

Explain the difference between the quantity theory and the liquidity preference theory in their implication about velocity.

Question 74

Explain why Friedman believed that the demand for money was not very sensitive to interest rates even the returns on stocks, bonds and money appear in his demand function.

Question 75

According to Friedman's theory, how would an increase in oil prices, which is both inflationary and recessionary, affect money demand?