Deck 19: 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

the institutions in an economy that affect individuals' transactions.

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

the average number of times that a dollar is spent in buying the total amount of final goods and services.

Question 3

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.

Answer 3

5.

Question 4

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 5

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 6

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 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

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 9

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 10

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 11

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 12

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 13

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 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 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 16

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 17

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 18

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 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

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 22

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 23

Until the Great Depression,economists did not recognize that velocity

A)increases during severe economic contractions.
B)declines during severe economic contractions.
C)declines during rapid economic expansions,since money growth fails to keep pace.
D)fails to decline during economic contractions.

Question 24

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 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 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 27

In the 20th century,velocity has

A)been quite stable over periods as long as a decade.
B)grown at a constant rate.
C)been quite volatile.
D)been quite stable over short,two year periods.

Question 28

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 29

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 30

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 31

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 32

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 33

The empirical evidence regarding the velocity of money indicates that velocity tends to be ________; that is,velocity ________ when economic activity contracts.

A)procyclical; declines
B)countercyclical; declines
C)countercyclical; increases
D)procyclical; increases

Question 34

________ 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 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

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 37

Velocity,over the business cycle,tends to

A)rise during economic contractions.
B)fall during economic expansions.
C)stay constant.
D)fall during economic contractions.

Question 38

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 39

Evidence since 1915 indicates that velocity has

A)grown at a fairly constant rate,even in the short run.
B)fluctuated too much in the short run to be viewed as a constant.
C)trended downward since 1950 due to technological and financial innovations.
D)remained fairly constant in the short run,but tends to slowly increase.

Question 40

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 41

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 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

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 44

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 45

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 46

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 47

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 48

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 49

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 50

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 51

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 52

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 53

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 54

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 55

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 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

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 58

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 59

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 60

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 61

In the Baumol-Tobin analysis of the demand for money,either an increase in ________ or an increase in ________ increases money demand.

A)income; interest rates
B)brokerage fees; interest rates
C)interest rates; the price level
D)brokerage fees; income

Question 62

The Baumol-Tobin analysis suggests that

A)velocity is relatively constant.
B)the transactions component of the demand for money is negatively related to the level of interest rates.
C)the speculative motive is nonexistent.
D)velocity is unrelated to the transactions motive.

Question 63

The speculative demand for money may not exist because

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.

Question 64

In the Baumol-Tobin analysis of transactions demand for money,either an increase in ________ or a decrease in ________ increases money demand.

A)income; interest rate
B)interest rates; brokerage fees
C)brokerage fees; income
D)interest rate; income

Question 65

According to Milton Friedman,the demand for money is insensitive to interest rates because

A)the demand for money is insensitive to changes in the opportunity cost of holding money.
B)competition among banks keeps the opportunity cost of holding money relatively constant.
C)people base their investment decisions on expected profits,not interest rates.
D)transactions are not subject to scale economies as wealth increases.

Question 66

The Baumol-Tobin analysis suggests that an increase in the brokerage fee for buying and selling bonds will cause the demand for money to ________ and the demand for bonds to ________.

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

Question 67

Because Treasury bills pay a higher return than money and have no risk

A)the transactions demand for money may be zero.
B)the precautionary demand for money may be zero.
C)the speculative demand for money may be zero.
D)all three of the above motives for holding money will be zero.

Question 68

Tobin's model of the speculative demand for money shows that people hold money as a store of wealth as a way of

A)reducing risk.
B)reducing income.
C)avoiding taxes.
D)reducing transactions cost.

Question 69

Tobin's model of the speculative demand for money improves on Keynes's analysis by showing that

A)the speculative demand for money is interest insensitive.
B)the transactions demand for money is interest insensitive.
C)people will hold a diversified portfolio.
D)people will hold money or bonds but not both.

Question 70

What factors determine the demand for money in the Baumol-Tobin analysis of transactions demand for money? How does a change in each factor affect the quantity of money demanded?

Question 71

The Baumol-Tobin analysis suggests that a decrease in the brokerage fee for buying and selling bonds will cause the demand for money to ________ and the demand for bonds to ________.

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

Question 72

Friedman's argument that competition among banks will tend to keep the difference between the return on bonds and money relatively constant implies that changes in ________ will have ________ on the demand for money.

A)interest rates; a big impact
B)income; a big impact
C)income; little effect
D)interest rates; little effect

Question 73

Tobin's model of the speculative demand for money shows that people can reduce their ________ by ________ their asset holdings.

A)wealth; diversifying
B)risk; specializing
C)return; diversifying
D)risk; diversifying

Question 74

Since the elimination of interest rate ceilings on deposits,the implicit interest rate on money more closely approaches bond interest rates.This suggests that changes in interest rates will

A)have a larger impact on money demand.
B)have a smaller impact on money demand.
C)no longer affect the speculative demand for money.
D)no longer affect the transactions demand for money.

Question 75

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 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

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 78

In the Baumol-Tobin analysis of transactions demand,scale economies imply that an increase in real income increases the quantity of money demanded ________,while an increase in the price level increases the quantity of money demanded ________.

A)proportionately; less than proportionately
B)more than proportionately; proportionately
C)less than proportionately; proportionately
D)proportionately; more than proportionately

Question 79

The Keynesian demand for real balances can be expressed as

A)M^d = f(i,Y).
B)M^d/P = f(i).
C)M^d/P = f(Y).
D)M^d/P = f(i,Y).

Question 80

Tobin's model of the speculative demand for money shows that people hold money as a ________ as a way of reducing ________.

A)medium of exchange; transaction costs
B)medium of exchange; risk
C)store of wealth; transaction costs
D)store of wealth; risk