Deck 20: Money Growth, Money Demand, and Modern Monetary Policy

Question 1

If the equation of exchange is MV = PY the Y represents:

A)Nominal GDP
B)Real GDP
C)Potential output
D)Economic growth

Answer 1

B

Question 2

Economic researchers have found:

A)No examples of countries with high rates of money growth and low inflation rates
B)Many examples of countries with low rates of money growth and high inflation rates
C)Many examples of countries with high rates of money growth and low inflation rates
D)No relationship between rates of money growth and inflation rates

Answer 2

A

Question 3

History proves that:

A)Countries with low rates of money growth have high rates of inflation
B)Money growth and inflation are not related
C)Countries with high rates of money growth have high rates of inflation
D)Money growth rates equal inflation rates

Answer 3

C

Question 4

Over the long run if central banks want to avoid high rates of inflation, they need to be concerned with the:

A)Unemployment rate
B)Money growth rate
C)Real economic growth rate
D)Productivity of labor

Question 5

If M2 is four times larger than M1, the velocity of M1 should be:

A)One-fourth of the velocity of M2
B)Equal to the velocity of M2
C)Equal to four
D)Four times larger than the velocity of M2

Question 6

For many of the countries that made up the Soviet Union, the period immediately following the collapse of the Soviet Union in 1990 found these countries experiencing:

A)Rapid economic growth
B)Severe deflation
C)Rapid development of financial intermediaries
D)Extremely high rates of inflation

Question 7

If M = the money supply; Y = real output, P = the price level, and V = velocity, which of the following equals the velocity of money?

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

Question 8

Consider the following ratio: the average annual inflation rate/the average annual money growth rate.A country with a ratio less than one would have:

A)An average inflation rate greater than the average rate of money growth
B)An average inflation rate less than the average rate of money growth
C)To have a high unemployment rate
D)An economy suffering from a recession

Question 9

Which of the following expresses the equation of exchange?

A)MY = PV
B)MV = Y
C)MV = PY
D)MP = VY

Question 10

Consider the following ratio: the average annual inflation rate/the average annual money growth rate.If a country's rate of money growth consistently exceeds the rate of inflation the ratio would be:

A)Less than one
B)Greater than one
C)That is infinite
D)Exactly one

Question 11

The velocity of money increases if:

A)Each unit of money is used more frequently
B)Each unit of money is used less frequently
C)More purchases are made
D)None of the above answers is correct; the velocity of money is constant

Question 12

Using the equation of exchange, if inflation is 1.5%, real output grows by 3.0%, and the growth rate of money is 5.0%, the change in the velocity of money is:

A)Zero; velocity is constant
B)-0.5%
C)+4.5%
D)+0.5%

Question 13

Which of the following statements is most correct?

A)The current rate of inflation is the result of money growth
B)Money growth is the result of inflation
C)There is no clear link between high, sustained inflation and the monetary aggregates
D)It is impossible to have high, sustained inflation without monetary accommodation

Question 14

The velocity of money equals:

A)Nominal GDP times the price level
B)Nominal GDP times the money supply
C)Nominal GDP divided by the price level
D)Nominal GDP divided by the money supply

Question 15

If money were valued in terms of how many minutes a person needs to work to buy a dollar, an increase in the number of minutes of work needed would be:

A)A decline in the price of money
B)An increase in the price of money
C)No change in the real price of money, just the nominal price increases
D)No change in the real or nominal price of money

Question 16

If we look at the value of money in terms of how many units of a good it takes to buy one dollar, then inflation means:

A)It would take more goods to buy the same dollar
B)It would take fewer goods to buy the same dollar
C)The same number of goods would buy fewer dollars
D)It would take fewer dollars to buy the same goods

Question 17

For many of the countries that made up the Soviet Union, the period immediately following the collapse of the Soviet Union in 1990 found these countries experiencing extremely high rates of inflation.To solve this problem, a number of countries:

A)Turned the authority to print money over to an independent central bank
B)Imposed price controls
C)Devalued their currencies
D)Returned to a gold standard

Question 18

When the currency loses value, causing people to spend it more quickly, this:

A)Has the same effect on inflation as an increase in money growth
B)Has the same effect on inflation as a decrease in money growth
C)Causes higher inflation but not as much as an increase in money growth would
D)Causes even higher inflation than an increase in money growth would

Question 19

According to the equation of exchange, if real output and the money supply stay the same and the price level increases:

A)The velocity of money has to increase
B)The velocity of money has to decrease
C)The real GDP had to rise
D)Nominal GDP remains constant

Question 20

Inflation can be thought of as:

A)An increase in the price of money
B)A decrease in the price of money
C)No change in the price of money, just in the supply of money
D)No change in the price of money, just in the demand for money

Question 21

Key assumptions behind the quantity theory of money include:

A)The money supply is fixed
B)The velocity of money is constant
C)The percentage change in the price level equals the percentage change in real GDP
D)The change in nominal GDP is zero

Question 22

Using the equation of exchange, if real GDP increases by 3.0%, the velocity of money grows by 1.0% and the growth rate of money is 3.0%; what is the rate of inflation?

A)+1.0%
B)It is constant or a 0% change
C)It is the same as the growth rate of money, or 3.0%
D)-1.0%

Question 23

If the equation of exchange was expressed for all transactions in the economy instead of real output, all other factors constant, the velocity of money would:

A)Remain the same
B)Decrease
C)Increase
D)The answer cannot be determined from the information provided

Question 24

If money growth and real output growth are both zero, the change in the price level will:

A)Also be zero
B)Equal the percentage change in velocity
C)Be indeterminate
D)Be the inverse of the percentage change in velocity

Question 25

If on average, a dollar is spent 4 times each year to purchase real output, the velocity of money is:

A)One-fourth
B)Four
C)The money supply divided by 4
D)Nominal GDP divided by four

Question 26

Using the equation of exchange, if inflation is 1%, the velocity of money grows by 1.0% and the growth rate of money is 3.0%; what is real growth?

A)+3.0%
B)1%
C)4.0%
D)-1.0%

Question 27

During economic slowdowns (recessions) the velocity of money tends to:

A)Remain relatively stable
B)Increase slightly
C)Increase dramatically
D)Decrease

Question 28

If we let Md reflect money demand, then we can write the equation for money demand as:

A)Md =VY
B)Md = PY
C)Md = (1/V) PY
D)Md = V(Y/P)

Question 29

A rate of inflation that exceeds the growth rate of money for a country could be explained by:

A)A growing real economy
B)A constant velocity of money
C)An increasing velocity of money
D)A decreasing velocity of money

Question 30

Milton Friedman's assertion that "inflation is a monetary phenomenon" is based on:

A)The quantity theory of money
B)The assumption of constant nominal GDP growth
C)The assumption that the price level grows at the same rate as real GDP
D)The assumption that the central bank increases the money supply by a constant rate every year

Question 31

Control of money growth to stabilize inflation only works if velocity were constant.In practice, changes in velocity:

A)Can safely be ignored in countries with relatively low inflation rates
B)Can safely be ignored in countries with relatively high inflation rates
C)Must be taken into account no matter what the inflation rate
D)Can always safely be ignored

Question 32

If we look at the equation for money demand from Irving Fisher, which of the following statements is true?

A)Velocity does not play any role in the equation
B)Money demand is not a factor of nominal income
C)The price level does not impact money demand
D)There isn't an explicit role for the interest rate in the equation

Question 33

Based on the analysis of the equation of exchange, Irving Fisher, derived the quantity theory of money which states that:

A)Velocity changes always offset changes in the supply of money
B)Changes in the aggregate price level are caused solely by changes in velocity
C)Changes in the aggregate price level are caused solely by changes in the quantity of money
D)None of the answers given are correct

Question 34

The empirical data reveals the velocity of M2 to be:

A)Relatively stable in the long run
B)Highly volatile in the long run
C)Stable only when measured annually
D)Higher than the velocity of M1

Question 35

If the Fed were to tie the rate of money growth to the Consumer Price Index (CPI), the rate of money growth might be excessive because:

A)The CPI does not measure inflation at the household level
B)Most economists maintain the CPI overstates inflation by 2 to 4 percent annually
C)Most economists maintain the CPI overstates inflation by 1 percent annually
D)Studies suggest that money growth is not related to the CPI

Question 36

Which of the following statements is most correct?

A)The velocity of M2 is relatively stable across all time periods
B)The velocity of M2 is less stable than the velocity of M1
C)The velocity of M2 is more volatile in the short run than the long run
D)Fisher's assumption about money velocity being stable in the long run was incorrect

Question 37

The quantity theory of money can explain which of the following?

A)If the % $\Delta$ Y > 0 and the % $\Delta$ V =0; the % $\Delta$ P < % $\Delta$ M
B)If the % $\Delta$ V = 0 and the % $\Delta$ M =0, the % $\Delta$ P must be = 0
C)If % $\Delta$ Y and the % $\Delta$ V = 0; the % $\Delta$ P > % $\Delta$ M
D)If the % $\Delta$ P > 0, the % $\Delta$ M must also be > 0

Question 38

Nobel-laureate economist Milton Friedman suggested that policymakers strive to ensure that the monetary aggregates:

A)Grow at a rate equal to the rate of inflation
B)Grow at a rate equal to the rate of real growth plus the desired level of inflation
C)Grow at a rate equal to the rate of real growth less the desired level of inflation
D)Remain constant in terms of dollar amounts

Question 39

Equilibrium in the money market would be expressed by which of the following?

A)Ms = (1/V)Y
B)Ms =Md
C)Ms = (1/V)P
D)Md = (1/V)P

Question 40

The quantity theory of money along with the assumption of a constant velocity can explain which of the following?

A)At a given level of money growth, the higher the level of real growth the higher the level of inflation will be
B)At a given level of money growth, the higher the level of real growth the lower the level of inflation will be
C)If real growth is higher than money growth the price level must be rising
D)If real growth equals money growth, the price level is falling

Question 41

When nominal interest rates are high, the velocity of money should:

A)Be low
B)Also be high
C)Not change; the velocity of money does not vary with the interest rate
D)Decrease by the same percent that the nominal interest rate has increased

Question 42

In May of 2003, the European Central Bank (ECB) decided to:

A)Focus almost exclusively on money growth as their target
B)Downgrade the role of money growth in their policymaking strategy
C)Limit the role of interest rate targeting to be second in importance to money growth targeting
D)Switch from an inflation target to a money growth target

Question 43

The interest rate earned on money holdings is:

A)The nominal interest rate
B)The nominal interest rate less the rate of inflation
C)The real interest rate less the rate of inflation
D)Zero

Question 44

If you were going to write a function for money demand, you would say that the demand for money holdings:

A)Varies directly with both the nominal interest rate and nominal income
B)Varies inversely with both the nominal interest rate and nominal income
C)Varies inversely with nominal income and directly with the nominal interest rate
D)Varies inversely with the nominal interest rate and directly with nominal income

Question 45

The higher the nominal interest rate:

A)The less money individuals will hold for any given level of transactions and the higher the velocity of money
B)The more money individuals will hold for any given level of transactions and the higher the velocity of money
C)The more money individuals will hold for any given level of transactions and the lower the velocity of money
D)The less money individuals will hold for any given level of transactions and the lower the velocity of money

Question 46

The wide use of credit cards should have its greatest impact on reducing:

A)The portfolio demand for money
B)The precautionary demand for money
C)The transaction demand for money
D)None of the answers given is correct since credit cards aren't money

Question 47

Which of the following would reflect the transactions demand for money?

A)Keeping funds in your checking account to pay your rent
B)Keeping funds in your savings account because the interest rate looks relatively attractive
C)Selling common stocks you own and increasing the money in your savings account because you think stock prices will fall soon
D)Buying a U.S.Treasury security using funds from your checking account

Question 48

If the nominal interest rate increases:

A)The cost of holding money decreases
B)The cost of holding money increases
C)The velocity of money should decrease
D)The cost of holding money increases and the velocity of money should decrease

Question 49

Money held for precautionary reasons is included in the demand for money:

A)As a third, separate category called the precautionary demand for money
B)As part of transactions demand
C)As part of portfolio demand
D)Partly as transactions demand and partly as portfolio demand

Question 50

Which of the following statements best completes the sentence, "All other factors constant, as the nominal interest rate increases, the opportunity cost of money...."?

A)Decreases, the velocity of money decreases, and the quantity of money people want to hold decreases
B)Increases, the velocity of money decreases, and the quantity of money people want to hold decreases
C)Decreases, the velocity of money increases, and the quantity of money people want to hold decreases
D)Increases, the velocity of money increases, and the quantity of money people want to hold decreases

Question 51

If real GDP stays the same but the price level increases:

A)Nominal money demand should remain the same
B)Nominal money demand should decrease
C)Nominal money demand should increase
D)Real money demand should decrease

Question 52

All other factors equal, as nominal interest rates decrease, checking account balances should:

A)Increase
B)Decrease
C)Remain constant
D)Be converted to cash

Question 53

All other factors equal, if the costs of converting bonds and other financial securities to a means of payment increase:

A)The transactions demand for money should increase
B)The transactions demand for money should decrease
C)It shouldn't impact the transactions demand for money
D)Nominal interest rates should decrease

Question 54

The fact that people can write drafts (checks) from many stock and money market accounts has:

A)Increased the transactions demand for money
B)Decreased the transactions demand for money
C)Not affected the transactions demand for money
D)Increased the cost of converting non-money assets to a means of payment

Question 55

Which of the following would be classified as precautionary demand for money?

A)You keep a $1000 in a money market account because the return is better than a savings account at your bank
B)You apply for and receive a credit card with a $1000 limit
C)You put $1000 in a savings account at your bank for emergencies
D)You put $1000 in your checking account each month to cover your regular expenses

Question 56

In high inflation countries, inflation rates can exceed the rate of growth of money because:

A)High inflation increases the velocity of money
B)High rates of inflation increase the opportunity cost of holding money
C)Money loses value quickly with inflation
D)All of the answers given are correct

Question 57

If your bank offers you free checking if your average balance is at least $1000 and you would normally carry an average balance of $500, what is the annual cost to you of free checking if bonds are paying a 5.0% return?

A)$50.00
B)$0.00
C)$20.00
D)$25.00

Question 58

In the late 1970s and early 1980s, the velocity of money increased significantly.The main reason(s) for the increase was:

A)As presidential election years near the velocity of money increases
B)The introduction of stock and bond mutual funds with draft writing privileges and low nominal interest rates
C)High nominal interest rates
D)The introduction of stock and bond mutual funds with draft writing privileges along with high nominal interest rates

Question 59

The portfolio demand for money reflects:

A)The money we hold for our everyday transactions
B)The portion of wealth people desire to hold in the form of money
C)The money we hold to purchase stocks and bonds and other financial securities
D)The money we hold for our everyday transactions and the money we hold to purchase stocks and bonds and other financial securities

Question 60

The opportunity cost of holding money is:

A)The nominal interest rate
B)The real interest rate
C)The nominal interest rate less the cost of converting a bond to cash
D)The rate of inflation

Question 61

You graduate from law school and can now begin charging clients very high fees for your time.What impact will this have on your demand for money?

A)Your increased income will likely cause your demand for money to decrease
B)Your opportunity cost of making trips to the bank will decrease
C)Your increased income will likely cause your demand for money to increase
D)Your demand for money will not be affected

Question 62

In the late 1990s, the financial crises that spread through the financial markets found people:

A)Holding less money
B)Increasing their holdings of bonds
C)Holding more money
D)Holding less money and increasing their holdings of bonds

Question 63

Between 1970 and 2000, if the Fed had tried to hit the money growth targets:

A)The economy would have likely experienced very high inflation
B)The federal funds rate would have changed often and by large amounts
C)The interest rates would have likely been more stable
D)The economy would have likely experienced very high inflation but the interest rates would have likely been more stable

Question 64

Stable velocity as a contributing factor to successfully using money growth as a stabilizing monetary policy tool, is more important in an environment where:

A)Inflation is extremely high (e.g., over 100 percent)
B)Inflation is low (e.g., less than 10 percent)
C)Inflation occurs, the problems caused by a variable velocity are just as severe at low levels of inflation as at high levels of inflation
D)There is deflation

Question 65

People have a portfolio demand for money in part because:

A)Money is part of a well diversified financial portfolio
B)The return on money is often higher than other financial assets
C)Money is needed to pay brokerage commissions
D)There is no cost to holding money which gives it a relatively high return

Question 66

The relationship between the velocity of money and interest rates is:

A)Positive but not stable
B)Negative but not stable
C)Positive and stable
D)Negative and stable

Question 67

The Lucas critique focuses specifically on:

A)The relationship between Fed policy and the money supply
B)The role that economic policymaking has on people's economic behavior
C)The inability to measure economic performance accurately
D)The moving away from fixed exchange rates to flexible exchange rates

Question 68

To use money growth as a short-term monetary policy instrument, a central bank must:

A)Believe there is some stable link between the monetary base and the money aggregates
B)Believe that only money matters
C)Believe that there is an unpredictable relationship between money aggregates and inflation
D)Believe the deposit expansion multiplier is volatile and unpredictable

Question 69

Between 1970 and 2000, the Fed:

A)Published their targets for money growth and often hit these targets
B)Never published targets or actual amounts for money growth
C)Published targets for money growth and rarely hit them
D)Published actual money growth but not targets

Question 70

For the Fed to use money growth as a direct monetary policy target, which of the following needs to exist?

A)A highly variable deposit expansion multiplier
B)A stable link between the monetary base and the quantity of money
C)A predictable relationship between the quantity of money and the rate of inflation
D)A stable link between the monetary base and the quantity of money and a predictable relationship between the quantity of money and the rate of inflation

Question 71

Empirical research has shown that:

A)In the 1990s, velocity was more sensitive to an increase in the opportunity cost of holding money than in the 1980s
B)In the 1990s, velocity was less sensitive to an increase in the opportunity cost of holding money than in the 1980s
C)During the 1980s and 1990s, the velocity of money was not sensitive to changes in the opportunity cost of holding money
D)During the 1980s and 1990s, the velocity of money actually decreased as the opportunity cost of holding money increased

Question 72

A cause of the decline in the velocity of money during the 2007-2009 financial crisis was a result of:

A)the fiscal stimulus provided by the US government
B)the lowering of the discount rate by the Fed
C)the use of unconventional policy tools by the Fed
D)an increase in uncertainty

Question 73

To say that the relationship between the velocity of money and the opportunity cost of holding money is not stable is the same as saying:

A)The supply of money is not stable
B)The money market is always in disequilibrium
C)Money demand is stable
D)Money demand is not stable

Question 74

The demand for money varies:

A)Directly with the liquidity of other financial assets
B)Inversely with the liquidity of other financial assets
C)Not all with the liquidity of other assets since money is liquid
D)Inversely with wealth
E)BLOOM'S: Remember

Question 75

If an investor thinks interest rates are likely to rise, she would:

A)Sell her bonds and hold more money
B)Buy more bonds now and hold less money
C)Not alter her bond portfolio until interest rates actually rise
D)Not change her money holdings at all

Question 76

The only solution available to a country experiencing extremely high rates of inflation is to:

A)Raise interest rates
B)Peg your currency to another country's currency
C)Reduce money growth
D)Revert to a gold standard

Question 77

As a person's wealth increases we would expect the demand for money to:

A)Decrease
B)Increase dollar for dollar with wealth
C)Increase but at a rate less than dollar for dollar
D)Not change; money demand does not vary with wealth, only with income

Question 78

Crises that occasionally hit financial markets will increase the demand for money since:

A)The return on money increases.
B)The return on financial assets increases.
C)There is no risk with holding money.
D)The risk of holding money relative to other financial assets decreases.

Question 79

A major contributing factor to the instability of money demand over the past 25 years is the:

A)Introduction of financial instruments that pay higher returns than money but can be used as a means of payment
B)Fed has changed the way the money aggregates are defined
C)Failure of many savings and loans
D)Introduction of credit cards

Question 80

A decline in the yields earned by bonds should:

A)Not impact the demand for money since money doesn't earn any interest
B)Also decrease the demand for money
C)Increase the demand for money
D)Increase the velocity of money