Deck 19: Quantity Theory, inflation and the Demand for Money

Question 1

Irving Fisher took the view that the institutional features of the economy which affect velocity change ________ over time so that velocity will be fairly ________ in the short run.

A)rapidly;erratic
B)rapidly;stable
C)slowly;stable
D)slowly;erratic

Answer 1

slowly;stable

Question 2

The equation of exchange is

A)M × P = V × Y.
B)M + V = P + Y.
C)M + Y = V + P.
D)M × V = P × Y.

Answer 2

M × V = P × Y.

Question 3

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

A)nominal income.
B)real income.
C)real gross national product.
D)velocity.

Answer 3

nominal income.

Question 4

The velocity of money is

A)the average number of times that a dollar is spent in buying the total amount of final goods and services.
B)the ratio of the money stock to high-powered money.
C)the ratio of the money stock to interest rates.
D)the average number of times a dollar is spent in buying financial assets.

Question 5

If the money supply is $20 trillion and velocity is 2,then nominal GDP is

A)$2 trillion.
B)$10 trillion.
C)$20 trillion.
D)$40 trillion.

Question 6

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

A)0.2.
B)5.
C)10.
D)20.

Question 7

If the money supply is $500 and nominal income is $3,000,the velocity of money is

A)1/60.
B)1/6.
C)6)
D)60.

Question 8

Because the quantity theory of money tells us how much money is held for a given amount of aggregate income,it is also a theory of

A)interest-rate determination.
B)the demand for money.
C)exchange-rate determination.
D)the demand for assets.

Question 9

If the money supply is $500 and nominal income is $4,000,the velocity of money is

A)1/20.
B)1/8.
C)8)
D)20.

Question 10

In the equation of exchange,the concept that provides the link between M and PY is called

A)the velocity of money.
B)aggregate demand.
C)aggregate supply.
D)the money multiplier.

Question 11

In Irving Fisher's quantity theory of money,velocity was determined by

A)interest rates.
B)real GDP.
C)the institutions in an economy that affect individuals' transactions.
D)the price level.

Question 12

If the money supply is $2 trillion and velocity is 5,then nominal GDP is

A)$1 trillion.
B)$2 trillion.
C)$5 trillion.
D)$10 trillion.

Question 13

Velocity is defined as

A)P + M + Y.
B)(P × M)/Y.
C)(Y × M)/P.
D)(P × Y)/M.

Question 14

The velocity of money is defined as

A)real GDP divided by the money supply.
B)nominal GDP divided by the money supply.
C)real GDP times the money supply.
D)nominal GDP times the money supply.

Question 15

If nominal GDP is $8 trillion,and the money supply is $2 trillion,velocity is

A)0.25.
B)4.
C)8.
D)16.

Question 16

The quantity theory of money is a theory of how

A)the money supply is determined.
B)interest rates are determined.
C)the nominal value of aggregate income is determined.
D)the real value of aggregate income is determined.

Question 17

If the money supply is $600 and nominal income is $3,600,the velocity of money is

A)1/60.
B)1/6.
C)6)
D)60.

Question 18

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

A)$1 trillion.
B)$5 trillion.
C)$10 trillion.
D)$100 trillion.

Question 19

The average number of times that a dollar is spent in buying the total amount of final goods and services produced during a given time period is known as

A)gross national product.
B)the spending multiplier.
C)the money multiplier.
D)velocity.

Question 20

If the money supply is $600 and nominal income is $3,000,the velocity of money is

A)1/50.
B)1/5.
C)5)
D)50.

Question 21

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

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.

Question 22

Fisher's quantity theory of money suggests that the demand for money is purely a function of ________,and ________ no effect on the demand for money.

A)income;interest rates have
B)interest rates;income has
C)government spending;interest rates have
D)expectations;income has

Question 23

Methods of financing government spending are described by an expression called the government budget constraint,which states the following

A)DEFICIT = (G - T)= ΔMB + ΔBONDS.
B)DEFICIT = (G - T)= ΔMB - ΔBONDS.
C)DEFICIT = (G - T)= ΔBONDS - ΔMB.
D)DEFICIT = (G - T)= ΔMB/ΔBONDS.

Question 24

Financing government spending with taxes

A)causes both reserves and the monetary base to rise.
B)causes both reserves and the monetary base to decline.
C)causes reserves to rise,but the monetary base to decline.
D)has no net effect on the monetary base.

Question 25

According to the quantity theory of money demand

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.

Question 26

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

A)increase;increase
B)increase;decrease
C)decrease;decrease
D)not change;not change

Question 27

The classical economists' contention that prices double when the money supply doubles is predicated on the belief that in the short run velocity is ________ and real GDP is ________.

A)constant;constant
B)constant;variable
C)variable;variable
D)variable;constant

Question 28

The quantity theory of inflation indicates that if the aggregate output is growing at 3% per year and the growth rate of money is 5%,then inflation is

A)2%.
B)8%.
C)-2%.
D)1)6%.

Question 29

Irving Fisher's view that velocity is fairly constant in the short run transforms the equation of exchange into the

A)Friedman's theory of income determination.
B)quantity theory of money.
C)Keynesian theory of income determination.
D)monetary theory of income determination.

Question 30

________ 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.

A)Keynes's
B)Fisher's
C)Friedman's
D)Tobin's

Question 31

Methods of financing government spending are described by an expression called the government budget constraint,which states the following

A)the government budget deficit must equal the sum of the change in the monetary base and the change in government bonds held by the public.
B)the government budget deficit must equal the difference between the change in the monetary base and the change in government bonds held by the public.
C)the government budget deficit must equal the difference between the change in the monetary base and the change in government bonds held by the Fed.
D)the government budget deficit must equal the difference between the change in the monetary base and the change in government bonds held by the Treasury.

Question 32

Cutting the money supply by one-third is predicted by the quantity theory of money to cause

A)a sharp decline in real output of one-third in the short run,and a fall in the price level by one-third in the long run.
B)a decline in real output by one-third.
C)a decline in output by one-sixth,and a decline in the price level of one-sixth.
D)a decline in the price level by one-third.

Question 33

Empirical evidence shows that the quantity theory of money is a good theory of inflation

A)in the long run,but not in the short run.
B)in the short run,but not in the longrun.
C)in both the long run and the short run.
D)not in either the long run nor the short run.

Question 34

The view that velocity is constant in the short run transforms the equation of exchange into the quantity theory of money. According to the quantity theory of money,when the money supply doubles

A)velocity falls by 50 percent.
B)velocity doubles.
C)nominal incomes falls by 50 percent.
D)nominal income doubles.

Question 35

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.

A)velocity;constant
B)velocity;variable
C)money;constant
D)money;variable

Question 36

The quantity theory of inflation indicates that the inflation rate equals

A)the growth rate of the money supply minus the growth rate of aggregate output.
B)the level of the money supply minus the level of aggregate output.
C)the growth rate of the money supply plus the growth rate of aggregate output.
D)the level of the money supply plus the level of aggregate output.

Question 37

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

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.

Question 38

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

A)increases real GDP to $10 trillion.
B)causes velocity to fall to 2.5.
C)increases the price level to 2.
D)increases the price level to 2 and velocity to 10.

Question 39

If the government finances its spending by issuing debt to the public,the monetary base will ________ and the money supply will ________.

A)increase;increase
B)increase;decrease
C)decrease;increase
D)not change;not change

Question 40

The classical economists believed that if the quantity of money doubled

A)output would double.
B)prices would fall.
C)prices would double.
D)prices would remain constant.

Question 41

The financing of government spending by issuing debt

A)causes both reserves and the monetary base to rise.
B)causes both reserves and the monetary base to decline.
C)causes reserves to rise,but the monetary base to decline.
D)has no net effect on the monetary base.

Question 42

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

A)interest rates.
B)velocity.
C)income.
D)stock market prices.

Question 43

The demand for money as a cushion against unexpected contingencies is called the

A)transactions motive.
B)precautionary motive.
C)insurance motive.
D)speculative motive.

Question 44

If the deficit is financed by selling bonds to the ________,the money supply will ________,increasing aggregate demand,and leading to a rise in the price level.

A)public;rise
B)public;fall
C)central bank;rise
D)central bank;fall

Question 45

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

A)interest rates.
B)velocity.
C)income.
D)stock market prices.

Question 46

Keynes argued that the precautionary component of the demand for money was primarily determined by the level of people's ________,which he believed were proportional to ________.

A)incomes;wealth
B)incomes;age
C)transactions;income
D)transactions;age

Question 47

The speculative motive for holding money is closely tied to what function of money?

A)store of wealth
B)unit of account
C)medium of exchange
D)standard of deferred payment

Question 48

Only when budget deficits are financed by money creation does the increased government spending lead to ________ in the ________.

A)a decrease;monetary base
B)an increase;monetary base
C)a decrease;money multiplier
D)an increase;money multiplier

Question 49

The Keynesian theory of money demand predicts that people will increase their money holdings if they believe that

A)interest rates are about to fall.
B)bond prices are about to rise.
C)expected inflation is about to fall.
D)bond prices are about to fall.

Question 50

Keynes argued that the transactions component of the demand for money was primarily determined by the level of people's ________,which he believed were proportional to ________.

A)transactions;income
B)transactions;age
C)incomes;wealth
D)incomes;age

Question 51

The finance of government spending through a Treasury sale of bonds which are then purchased by the Fed

A)causes both reserves and the monetary base to rise.
B)causes both reserves and the monetary base to decline.
C)causes reserves to rise,but the monetary base to decline.
D)has no net effect on the monetary base.

Question 52

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

A)increases;increases
B)increases;decreases
C)decreases;increases
D)decreases;decreases

Question 53

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

A)the transactions motive
B)the precautionary motive
C)the speculative motive
D)the altruistic motive

Question 54

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

A)interest rates.
B)velocity.
C)income.
D)stock market prices.

Question 55

If the deficit is financed by selling bonds to the ________,the money supply will ________,causing aggregate demand to ________.

A)public;rise;increase
B)public;fall;decrease
C)central bank;rise;increase
D)central bank;fall;decrease

Question 56

The Keynesian theory of money demand emphasizes the importance of

A)a constant velocity.
B)irrational behavior on the part of some economic agents.
C)interest rates on the demand for money.
D)expectations.

Question 57

This method of financing government spending is frequently called printing money because high-powered money (the monetary base)is created in the process.

A)financing government spending with taxes
B)financing government spending through a Treasury sale of bonds that are then purchased by the Fed
C)financing government spending by selling bonds to the public,which pays for the bonds with currency
D)financing government spending by selling bonds to the public,which pays for the bonds with checks

Question 58

Financing government spending by selling bonds to the public,which pays for the bonds with currency,

A)leads to a permanent decline in the monetary base.
B)leads to a permanent increase in the monetary base.
C)leads to a temporary increase in the monetary base.
D)has no net effect on the monetary base.

Question 59

Because Keynes assumed that the expected return on money was zero,he argued that people would

A)never hold money.
B)never hold money as a store of wealth.
C)hold money as a store of wealth when the expected return on bonds was negative.
D)hold money as a store of wealth only when forced to by government policy.

Question 60

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

A)rises;increases
B)rises;decreases
C)falls;increases
D)falls;decreases

Question 61

The theory of portfolio choice indicates that factors affecting the demand for money include

A)income.
B)nominal interest rate.
C)riskiness of money.
D)all the above.

Question 62

The portfolio theories of money demand state that the demand for real money balances is ________ related to income and ________ related to the nominal interest rate.

A)positively;negatively
B)positively;positively
C)negatively;negatively
D)negatively;positively

Question 63

According to Keynes's theory of liquidity preference,velocity increases when

A)income increases.
B)wealth increases.
C)brokerage commissions increase.
D)interest rates increase.

Question 64

The Keynesian demand for real balances can be expressed as

A)Mᵈ = f(i,Y).
B)Mᵈ/P = f(i).
C)Mᵈ/P = f(Y).
D)Mᵈ/P = f(i,Y).

Question 65

Keynes's theory of the demand for money implies that velocity is

A)not constant but fluctuates with movements in interest rates.
B)not constant but fluctuates with movements in the price level.
C)not constant but fluctuates with movements in the time of year.
D)a constant.

Question 66

Explain the Keynesian theory of money demand. What motives did Keynes think determined money demand? What are the two reasons why Keynes thought velocity could NOT be treated as a constant?

Question 67

Keynes's model of the demand for money suggests that velocity is ________ related to ________.

A)positively;interest rates
B)negatively;interest rates
C)positively;bond values
D)positively;stock prices

Question 68

Keynes's theory of the demand for money is consistent with ________ movements in ________.

A)countercyclical;velocity
B)procyclical;velocity
C)countercyclical;expectations
D)procyclical;expectations

Question 69

The theory of portfolio choice indicates that higher interest rates make money ________ desirable,and the demand for real money balances ________.

A)less;falls
B)more;falls
C)less;rises
D)more;rises

Question 70

As interest rates rise,the expected absolute return of money ________,money's expected return relative to bonds ________.

A)does not change;decrease
B)rises;decrease
C)does not change;increase
D)falls;decrease

Question 71

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

A)is purely a function of income,and interest rates have no effect on the demand for money.
B)is purely a function of interest rates,and income has no effect on the demand for money.
C)is a function of both income and interest rates.
D)is a function of both government spending and income.

Question 72

Keynes argued that when interest rates were low relative to some normal value,people would expect bond prices to ________ so the quantity of money demanded would ________.

A)increase;increase
B)increase;decrease
C)decrease;increase
D)decrease;decrease

Question 73

The portfolio theories of money demand state that when income (and therefore,wealth)is higher,the demand for the money asset will ________ and the demand for real money balances will be ________.

A)rise;higher
B)rise;lower
C)fall;higher
D)fall;lower

Question 74

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

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

Question 75

Because interest rates have substantial fluctuations,the ________ theory of the demand for money indicates that velocity has substantial fluctuations as well.

A)classical
B)Cambridge
C)liquidity preference
D)Pigouvian

Question 76

Keynes's liquidity preference theory indicates that the demand for money is ________ related to ________.

A)negatively;interest rates
B)positively;interest rates
C)negatively;income
D)negatively;wealth

Question 77

Keynes's theory of the demand for money is consistent with

A)countercyclical movements in velocity.
B)a constant velocity.
C)procyclical movements in velocity.
D)a relatively stable velocity.

Question 78

Keynes argued that when interest rates were high relative to some normal value,people would expect bond prices to ________,so the quantity of money demanded would ________.

A)increase;increase
B)increase;decrease
C)decrease;decrease
D)decrease;increase

Question 79

The theory of portfolio choice indicates that factors affecting the demand for money include

A)income.
B)nominal interest rate.
C)liquidity of other assets.
D)all the above.

Question 80

Keynes's model of the demand for money suggests that velocity is

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