Deck 20: Quantity Theory, Inflation, and the Demand for Money

Question 1

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

Answer 1

C

Question 2

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

Answer 2

A

Question 3

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

Answer 3

C

Question 4

Inflation increased from ________ in 2007 to ________ by the middle of 2008.

A)1 percent; over 3 percent
B)1)5 percent; nearly 3 percent
C)2)6 percent; over 5 percent
D)3 percent; almost 7 percent

Question 5

If the money supply is $600 and nominal income is $3000, the velocity of money is ________.

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

Question 6

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

Question 7

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 8

The effect of money on the economy is called ________.

A)monetary supply
B)monetary policy
C)fiscal policy
D)monetary demand

Question 9

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 10

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 11

The demand for money represents ________.

A)the quantity of money that people want to hold
B)the relationship between inflation rates and the quantity of money
C)the relationship between interest rates and income
D)All of the above.

Question 12

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 13

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 14

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

Question 15

Which events created the perfect storm for the Canadian economy in 2007-2008?

A)An oil price shock and the global financial crisis.
B)Housing prices had doubled in most major metropolitan areas.
C)Prime mortgage interest rates were rising.
D)All of the above.

Question 16

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 17

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 18

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 19

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

Question 20

Velocity is defined as ________.

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

Question 21

Explain the conclusion that the quantity theory of money is a good theory of inflation in the long run, but not in the short run. How does is this conclusion related to flexible wages and prices.

Question 22

________ 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 23

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 24

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 25

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 26

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 27

If the government deficit is financed by an increase in bond holdings by the public ________.

A)there is no effect of the monetary base
B)there is no effect on the money supply
C)the money supply increases
D)A and B only

Question 28

A plot of Canadian inflation against annual money growth rate between 1971 and 2011 shows ________.

A)money supply lags by two years
B)money supply lags by one year
C)that the two are contemporaneously correlated
D)are uncorrelated

Question 29

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 30

Budget deficits can be an important source of ________ monetary policy.

A)inflationary
B)recessionary
C)federal
D)fiscal

Question 31

Give the equation of exchange and explain the variables used in it. Why we call it an identity?

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

The government can ________ by ________.

A)raise revenue; levying taxes
B)go into debt; issuing government bonds.
C)create money; levying taxes.
D)A and B only.

Question 34

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 35

One part of monetizing the debt is for the central bank to ________.

A)conduct an open market purchase
B)conduct an open market sale
C)increasing the overnight rate
D)decreasing the overnight rate

Question 36

Financing a debt through the direct-issue of currency is called ________.

A)printing money
B)monetizing the debt
C)open market purchases
D)open market sales

Question 37

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 38

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 39

Empirically testing the long-term quantity of money for Canada shows ________.

A)a strong positive relationship between inflation and money growth rates
B)a weak positive relationship between inflation and money growth rates
C)a weak negative relationship between inflation and money growth rates
D)a strong negative relationship between inflation and money growth rates

Question 40

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

A)solely from 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 41

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 42

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 43

Explain how financing a persistent deficit by money creation will lead to a sustained inflation.

Question 44

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 45

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

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

Question 46

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 47

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

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

Question 48

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 49

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 50

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 51

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 52

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 53

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 54

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 55

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 56

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 57

In March 2007, the inflation rate in Zimbabwe reached ________.

A)over 1500 percent
B)over 150 percent
C)over 15 percent
D)over 15000 percent

Question 58

The Zimbabwean hyperinflation was caused by ________.

A)the government printing currency
B)wars between rebel factions
C)budget surplus
D)the agricultural sector

Question 59

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 60

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 61

Examples of inflation hedges include ________.

A)real return bonds
B)the stock market
C)bonds
D)currency

Question 62

Inflation hedges ________.

A)have real returns that are less affected by inflation
B)increase the risk and return from holding currency
C)exhibit zero return
D)are denominated in nominal terms

Question 63

Financial innovation will ________ and ________.

A)improve the liquidity of alternative assets; decrease the demand for money
B)improve the liquidity of alternative assets; increase the demand for money
C)reduce the relative liquidity of money; increase the demand for money
D)A and C only

Question 64

Describe the factors that affect the demand for money.

Question 65

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 66

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 67

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 68

The evidence on the interest sensitivity of the demand for money suggests that the demand for money is ________ to interest rates, and there is ________ evidence that a liquidity trap exists.

A)sensitive; substantial
B)sensitive; little
C)insensitive; substantial
D)insensitive; little

Question 69

Explain the speculative motive for holding money in Keynes's liquidity preference theory.

Question 70

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

Question 71

Currency and chequable deposits are said to be ________.

A)dominated assets
B)risky assets
C)interest bearing
D)income

Question 72

There are ________ factors that affect the demand for money.

A)three
B)five
C)six
D)seven

Question 73

The theory of portfolio choice says that the demand for an asset is ________ related to ________.

A)positively; wealth
B)negatively; expected return
C)negatively; wealth
D)positively; risk.

Question 74

Explain the precautionary motive for holding money in Keynes's liquidity preference theory.

Question 75

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 76

Money is extremely safe ________.

A)in real terms
B)in nominal terms
C)relative to currency
D)relative to inflation hedges

Question 77

Explain the transactions motive for holding money in Keynes's liquidity preference theory.

Question 78

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 79

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 80

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