Deck 9: The Money Market and Monetary Policy

Question 1

What would cause the total demand for money to shift to the left?

A)An increase in nominal GDP.
B)An increase in the rate of interest.
C)A decrease in the rate of interest.
D)An increase in the price level.
E)A decrease in nominal GDP.

Answer 1

A decrease in nominal GDP.

Question 2

On a diagram with the interest rate on the vertical axis and the quantity of money on the horizontal axis,how can the transactions demand for money be shown?

A)As a line parallel to the horizontal axis.
B)As a vertical line.
C)As a curve sloping downwards from left to right.
D)As a curve sloping upwards from left to right.
E)It cannot be shown on such a diagram.

Answer 2

As a vertical line.

Question 3

What does the term transactions demand for money refer to?

A)The demand for money by the Bank of Canada in order to settle international transactions.
B)The demand for money by the public in order to effect transactions.
C)The desire by the public to receive income in the form of money.
D)The demand for money by the public in order to make financial investments.

Answer 3

The demand for money by the public in order to effect transactions.

Question 4

Which is true of the demand for money?

A)It is infinite.
B)It is made up of transactions demand and asset demand.
C)It is determined by the Bank of Canada.
D)It is determined by real income.
E)It is the same as the demand for income.

Question 5

Why is the asset demand for money curve downward-sloping?

A)As the interest rate increases,the opportunity cost of holding money also increases.
B)As the interest rate increases,the opportunity cost of holding money decreases.
C)As the interest rate increases,so too do bond prices.
D)It becomes more attractive to hold money as the interest rate increases.
E)As people hold larger quantities of money,the interest rate is forced down.

Question 6

What determines the supply of money?

A)The demand for money.
B)The interest rate.
C)The velocity of money.
D)The level of nominal income.
E)The Bank of Canada.

Question 7

Which of the following is inversely related to the interest rate?

A)The velocity of money.
B)The quantity of asset money demanded.
C)The level of prices.
D)The quantity of transactions money demanded.
E)The level of savings.

Question 8

On a diagram with the interest rate on the vertical axis and the quantity of money demanded on the horizontal axis,what can the asset demand for money be shown as?

A)A line parallel to the horizontal axis.
B)A vertical line.
C)A curve sloping downwards from left to right.
D)A curve sloping upwards from left to right.
E)It cannot be shown on such a diagram.

Question 9

The asset demand for money is most closely related to which function of money?

A)The unit of account.
B)The medium of exchange.
C)The store of wealth.
D)The unit of value.
E)The value in use.

Question 10

Which of the following is true regarding the opportunity cost of holding money?

A)It varies directly with the rate of interest.
B)It varies inversely with the rate of interest.
C)It varies inversely with nominal GDP.
D)It varies directly with the stock of wealth.
E)It is zero because money is not an economic resource.

Question 11

On a diagram with the interest rate on the vertical axis and the quantity of money demanded on the horizontal axis,how can the total demand for money be obtained?

A)By adding the transactions and the asset demand for money horizontally.
B)By subtracting the transactions demand from the asset demand for money vertically.
C)By subtracting the asset demand from the transactions demand for money horizontally.
D)By adding the transactions and the asset demand for money vertically.
E)The asset and transaction demands are unrelated and therefore cannot be added or subtracted.

Question 12

What results if the quantity of money demanded exceeds the quantity supplied?

A)The supply-of-money curve will shift to the left.
B)The demand-for-money curve will shift to the right.
C)The demand-for-money curve will shift to the left.
D)The rate of interest will fall.
E)The rate of interest will increase.

Question 13

Which of the following statements is correct?

A)An increase in prices will shift the transactions demand curve for money to the right but leave the total money demand curve unchanged.
B)A decrease in prices will shift both the transactions demand and the total money demand curves to the left.
C)A fall in real GDP will shift both the transactions demand and the total money demand curve to the right.
D)A decline in real GDP will shift the transactions demand curve to the left but leave the total money demand curve unchanged.
E)A fall in the rate of interest will shift both the asset demand and the total demand curves to the right.

Question 14

What the term asset demand for money refer to?

A)The demand for money by the Bank of Canada in order to settle international transactions.
B)The demand for money by the public in order to purchase real assets such as buildings and real estate.
C)That portion of the money supply which is held by the chartered banks as assets.
D)The desire by people to use money as a store of wealth.

Question 15

In which direction will the transaction demand for money curve shift?

A)Right when nominal GDP increases.
B)Left when nominal GDP increases.
C)Right when nominal GDP decreases.
D)Right when interest rate increases.
E)Left when the interest rate decreases.

Question 16

Which of the following statements is correct regarding an interest rate above equilibrium?

A)It will result in a shortage of money in the money market.
B)It will result in a surplus of money in the money market.
C)It is a result of people demanding too much money.
D)It is a result of people demanding too little money.
E)It is the normal state of affairs.

Question 17

The desire of people to hold money as a medium of exchange describes what type of money demand?

A)The asset demand for money.
B)The transactions demand for money.
C)The investment demand.
D)The velocity of circulation.

Question 18

The desire of people to hold money as a store of wealth describes what type of money demand?

A)The asset demand for money.
B)The transactions demand for money.
C)The investment demand.
D)The velocity of circulation.

Question 19

If both the demand for money and the supply of money increase,what can we conclude will happen to the equilibrium?

A)The interest rate will fall,but the effect on quantity of money is indeterminate.
B)The interest rate will rise,but the effect on the quantity of money is indeterminate.
C)The quantity of money will increase,but the effect on the interest rate is indeterminate.
D)The quantity of money will fall,but the effect on the interest rate is indeterminate.
E)Both the interest rate and the quantity of money will increase.

Question 20

When can we be certain that the quantity of money demanded will decrease?

A)When nominal GDP decreases and the interest rate increases.
B)When nominal GDP increases and the interest rate increases.
C)When nominal GDP decreases and the interest rate decreases.
D)When nominal GDP increases and the interest rate decreases.

Question 21

Refer to the graph above to answer this question.What does the vertical money supply curve MS reflect?

A)The fact that lower interest rates imply that a lower opportunity cost of supplying money.
B)The fact that the supply of money is determined by the Bank of Canada and is not affected by changes in the interest rate.
C)The fact that bond prices and therefore interest rates are not affected by the supply of money.
D)The fact that money supply is dependent on the rate of interest.

Question 22

What is the relationship between the price of government bonds and the rate of return received by bond-holders?

A)They are directly related.
B)They are inversely related.
C)They are unrelated.
D)They are independent of Bank of Canada open-market operations.
E)They are both dependent on the level of investment.

Question 23

Refer to the graph above to answer this question.Why is an interest rate of r₁ untenable?

A)Because people will buy bonds to obtain more money thereby causing the interest rate to increase.
B)Because people will buy bonds to obtain more money thereby causing the interest rate to fall.
C)Because people will sell bonds to obtain more money thereby causing the interest rate to fall.
D)Because people will sell bonds to obtain more money thereby causing the interest rate to increase.
E)Because people will buy bonds to get rid of their excess money balances thereby causing the interest rate to increase.

Question 24

How is the equilibrium rate of interest in the money market determined?

A)By the intersection of the supply of money and the asset demand for money.
B)By the intersection of the supply of money and the transactions demand for money.
C)By the intersection of the supply of money and the total demand for money.
D)By the intersection of aggregate expenditures and the total demand for money.

Question 25

Refer to the graph above to answer this question.Suppose that the economy is in equilibrium and each dollar held for transactions purposes is spent on average four times per year,what can we infer from this?

A)That nominal GDP is $800.
B)That real GDP is $1,000.
C)That the money supply is $800.
D)That nominal GDP is $400.

Question 26

If the money supply exceeds the quantity of money demanded,what will interest rate do?

A)Rise,causing people to hold less money.
B)Fall,causing people to hold less money.
C)Rise,causing people to hold more money.
D)Fall,causing people to hold more money.
E)Remain unchanged,but the demand for money would increase.

Question 27

Refer to the graph above to answer this question.If the interest rate is 8 percent what will people do?

A)Sell bonds which will cause bond prices to fall and the interest rate to fall.
B)Buy bonds which will cause bond prices to rise and the interest rate to fall.
C)Have insufficient liquidity which will cause them to reduce their spending on consumer goods.
D)Buy bonds which will cause bond prices to fall and the interest rate to rise.

Question 28

Below is some data concerning the money market?

Refer to the information above to answer this question.If equilibrium national income is $680 and the transaction demand for money is 10 percent of national income and the equilibrium interest rate is 7 percent then what is the supply of money?

A)$149.
B)$142.
C)$135.
D)$128.
E)$121.

Question 29

Refer to the graph above to answer this question.Under what circumstance would the money demand curve in the diagram shift leftward?

A)If the asset demand for money increased.
B)If the transactions demand for money increased.
C)If the price level increased.
D)If nominal GDP increased.
E)If the price level decreased.

Question 30

Refer to the graph above to answer this question.Why is the money demand curve MD downward-sloping?

A)The transactions demand for money is downward-sloping.
B)There is a direct relationship between bond prices and interest rates.
C)The asset demand for money is downward-sloping.
D)Because of the wealth or real-balances effect.
E)The opportunity cost of holding money increases as the interest rates decreases.

Question 31

Refer to the graph above to answer this question.Which curve represents the total demand for money?

A)MD1.
B)MD2.
C)MD3.
D)MS.

Question 32

Refer to the graph above to answer this question.What is the equilibrium interest rate?

A)r₁.
B)r₂.
C)r₃.
D)It cannot be determined from the information.

Question 33

Below is some data concerning the money market?

Refer to the information above to answer this question.If the supply of money is $130,what is the value of the equilibrium interest rate?

A)8%.
B)7%.
C)6%.
D)5%.
E)4%.

Question 34

Refer to the graph above to answer this question.Which curve represents the transactions demand for money?

A)MD1.
B)MD2.
C)MD3.
D)MS.

Question 35

Below is some data concerning the money market?

Refer to the information above to answer this question.If the transactions demand for money is 10 percent of national income and the supply of money is $135 then what would be the equilibrium interest rate?

A)4%.
B)5%.
C)6%.
D)7%.
E)8%.

Question 36

Refer to the graph above to answer this question.How will people react if the interest rate is 3 percent?

A)They will sell bonds which will cause bond prices to fall and the interest rate to rise.
B)They will buy bonds which will cause bond prices to fall and the interest rate to rise.
C)They will sell bonds which will cause bond prices to rise and the interest rate to rise.
D)They will buy bonds which will cause bond prices to rise but have an uncertain effect upon the interest rate.

Question 37

If the quantity of money demanded exceeds the money supply,what will the interest rate do?

A)Rise,causing people to hold less money.
B)Fall,causing people to hold less money.
C)Rise,causing people to hold more money.
D)Fall,causing people to hold more money.
E)Remain unchanged,but the demand for money would decrease.

Question 38

Below is some data concerning the money market?

Refer to the information above to answer this question.If the supply of money is currently 140 and the interest rate is at equilibrium,then what will an increase in the supply of money by 20 do?

A)It will lower the asset demand for money.
B)It will not change the interest rate.
C)It will raise the interest rate by 2%.
D)It will lower the interest rate by 2%.

Question 39

Refer to the above graph above to answer this question.What will happen if the Bank of Canada increases the supply of money?

A)The MD3 curve would shift right and the equilibrium interest rate will rise.
B)The MD3 curve would shift right and the equilibrium interest rate will fall.
C)The MS curve would shift left and the equilibrium interest rate will fall.
D)The MS curve would shift right and the equilibrium interest rate will fall.
E)The MS curve would shift right and the equilibrium interest rate will rise.

Question 40

Below is some data concerning the money market?

Refer to the information above to answer this question.If the transaction demand for money is 10 percent of equilibrium national income which is 700 and the equilibrium interest rate is 6 percent then which of the following is true?

A)The supply of money must be $142.
B)The transactions demand for money must be $72.
C)The supply of money must be $149.
D)The supply of money must be $135.

Question 41

According to monetarists,how does a change in the money supply affect the economy?

A)By changing the velocity of the money which in turn changes the nominal GDP.
B)By changing the rate of interest which in turn changes nominal GDP.
C)By changing investment which in turn changes nominal GDP.
D)By changing aggregate expenditures which in turn changes nominal GDP.

Question 42

In the Keynesian transmission process what follows after an increase in the money supply has caused a fall in the interest rate?

A)GDP falls.
B)Investment spending falls.
C)Investment spending rises.
D)Nothing happens.

Question 43

In the equation of exchange,what does V represent?

A)The reciprocal of the price level.
B)The reciprocal of the money multiplier.
C)The quantity of real output.
D)The number of times per year the average dollar is spent.
E)The value or purchasing power of the dollar.

Question 44

What effect will an increase in the money supply have on the price level and on real GDP?

A)The price level will increase and real GDP will decrease.
B)The price level will decrease and real GDP will increase.
C)Both the price level and real GDP will increase.
D)Both the price level and real GDP will decrease.

Question 45

See the following graphs:

Refer to the graph above to answer this question.What is the effect of a decrease in the money supply of 40?

A)A decrease in the interest rate of 3 percentage points.
B)A decrease in the interest rate of 6 percentage points.
C)An increase in investment spending of $20.
D)A decrease in investment spending of $20.
E)An increase in aggregate demand of $40.

Question 46

If the amount of money in circulation is $140 billion and the nominal GDP of the economy is $840 billion,then which of the following is true?

A)The circulation period of money must be six months.
B)The velocity of money is 2.
C)The average price per final good sold is $6.
D)The velocity of money is 6.
E)The money multiplier must be 2.

Question 47

What are two of the determinants of the transactions demand for money?

A)The level of real income and the interest rate.
B)The level of real income and the price level.
C)The interest rate and the price level.
D)The interest rate and the supply of money.
E)The interest rate and the demand for money.

Question 48

What does the equation of exchange say?

A)That if the economy is at full employment,then an increase in M will cause a proportionate decrease in P.
B)MP = VQ.
C)That the velocity and the supply of money vary directly with one another.
D)MV = PQ.
E)That other things being equal,the price level varies inversely with the supply of money.

Question 49

What will an increase in the money supply tend to do?

A)Increase interest rates and lower the equilibrium GDP.
B)Increase interest rates and increase the equilibrium GDP.
C)Lower interest rates and increase the equilibrium GDP.
D)Lower interest rates and lower the equilibrium GDP.
E)Interest rate and equilibrium GDP does not change.

Question 50

According to the Keynesian transmission process,what will be the effect of a decrease in the money supply?

A)An increase in the interest rate,an increase in investment spending,and an increase in GDP.
B)An increase in the interest rate,an increase in investment spending,and a decrease in GDP.
C)An increase in the interest rate,a decrease in investment spending,and a decrease in GDP.
D)A decrease in the interest rate,an increase in investment spending,and an increase in GDP.
E)A decrease in the interest rate,a decrease in investment spending,and a decrease in GDP.

Question 51

If the money supply remains constant and the nominal GDP increases,what can we conclude?

A)The velocity of money will fall.
B)The price index will fall.
C)Interest rates will rise.
D)Bond prices will rise.

Question 52

What would happen to the level of investment spending if the investment demand curve shifted to the right at the same time that the demand for money curve shifted to the right?

A)It would rise.
B)It would fall.
C)It would not change.
D)It cannot be determined.

Question 53

What does the Keynesian transmission process involve?

A)Money demand,the exchange rate,investment and GDP.
B)Money supply,the interest rate,investment and GDP.
C)The interest rate,GDP and the asset demand for money.
D)Only the interest rate and GDP.
E)Only the level of investment and GDP.

Question 54

In a full-employment economy a rise in M could cause inflation.Under what circumstance will this not happen?

A)If real GDP falls by the same proportion.
B)If real GDP increases by the same proportion.
C)If tax reductions accompany the increase in the money supply.
D)If the velocity of money falls.
E)If the demand for money increases by the same amount.

Question 55

The interest rate can be thought of as which of the following?

A)As a reflection of the demand for money.
B)As a reflection of the supply of money.
C)As the price of money.
D)As a result of the level of investment.
E)As a result of the level of saving.

Question 56

All of the following statements,except one,are correct.Which is the exception?

A)A decline in the demand for money will tend to reduce the equilibrium GDP.
B)The equilibrium interest rate varies directly with money demand.
C)The equilibrium interest rate varies inversely with money supply.
D)The equilibrium interest rate varies directly with the level of prices.
E)A decline in the supply of money tends to reduce equilibrium GDP.

Question 57

Explain how a decrease in the price level affects the aggregate quantity demanded.

A)It causes an increase in the interest rate and a decrease in investment spending.
B)It causes an increase in the interest rate and an increase in investment spending.
C)It causes a decrease in the interest rate and a decrease in investment spending.
D)It causes a decrease in the interest rate and an increase in investment spending.
E)It causes a decrease in the interest rate and an increase in savings.

Question 58

What does the velocity of money measure?

A)The number of times that money is spent on the same article during a year.
B)The reciprocal of the reserve ratio.
C)The average annual rate of increase in the money supply.
D)The rate at which the money supply turns over in generating income.
E)The ratio of the total demand for money to the transactions demand.

Question 59

If M is $50,P is $2,and Q is $250,what is the result?

A)V must be 4.
B)V must be 10.
C)V cannot be determined.
D)V must be 2.5.
E)Aggregate expenditures will be $12,500.

Question 60

What is meant by the velocity of money?

A)The number of times per year that each unit of currency is used before it is recalled by The Canadian Mint.
B)The number of times per year that the average unit of currency is spent buying final goods and services.
C)The money supply divided by the level of GDP.
D)The rate at which M1 changes into M2 or M3.

Question 61

Assume that the demand for money equals the supply of money of $80 billion and that the nominal GDP is $400 billion.According to the monetarist view,by how much will an increase in the money supply of $5 billion increase the nominal GDP?

A)By $30 billion.
B)By $25 billion.
C)By $20 billion.
D)By $10 billion.
E)By zero.

Question 62

Table 9.1 contains data relating to the money market.

Refer to Table 8.1 to answer this question.What are the implications if the current supply of money is $160 and the interest rate is 7 percent?

A)The interest rate will fall.
B)The interest rate will rise.
C)The asset demand will fall.
D)The transactions demand will fall.

Question 63

Who regards the velocity of money as constant?

A)All economists.
B)Keynesians.
C)Monetarists.
D)No economist.
E)All those who believe that there is an asset demand for money.

Question 64

In the equation of exchange,how can real GDP be expressed?

A)PQ.
B)MV/P.
C)P/Q.
D)PQ/V.
E)MP/V.

Question 65

According to the equation of exchange,if V is constant,and the economy is at full employment,what would a 5 percent increase in the money supply do?

A)It will cause P to increase by less than 5%.
B)It will cause P to increase by more than 5%.
C)It will cause P to increase by 5%.
D)It will cause P to decrease by 5%.
E)It will not affect P.

Question 66

To be able to determine the value of the velocity of money what would one need to know?

A)Nominal and real GDP.
B)The money supply and the price level.
C)Nominal GDP and the money supply.
D)Nominal GDP and the interest rate.
E)Real GDP and the price level.

Question 67

If the average household earns and spends $40,000 per year and holds a money balance of $10,000,then what is the velocity of money for the average householder?

A)10.
B)1/10.
C)1/4.
D)4.
E)It cannot be determined from the information.

Question 68

Which of the following accurately describes Milton Friedman?

A)He was a classical economist and contemporary of Adam Smith.
B)He popularized monetarism.
C)He advanced Keynesian analysis of Say's Law.
D)He followed Keynes into the British civil service.
E)He is considered the father of modern economics.

Question 69

When does the demand for money curve to shift to the left?

A)If nominal GDP increases.
B)If the interest rate increases.
C)If the price level decreases.
D)If real GDP increases.

Question 70

To which function of money is the transactions demand most closely related?

A)Unit of account.
B)Medium of exchange.
C)Store of wealth.
D)Asset demand.

Question 71

What is the effect of an increase in the money supply?

A)It causes the transactions demand curve to shift right.
B)It causes the transactions demand curve to shift left.
C)It causes a movement down the transactions demand curve.
D)It causes a movement up the transactions demand curve.

Question 72

Table 9.1 contains data relating to the money market.

Refer to Table 8.1 to answer this question.If the supply of money is $150,what is the value of the equilibrium interest rate?

A)4 percent.
B)5 percent.
C)6 percent.
D)7 percent.

Question 73

According to monetarists,which of the following will cause the demand for money to rise?

A)An increase in interest rates.
B)An increase in the price level.
C)An increase in real GDP but a decrease in the price level.
D)An increase in nominal GDP.
E)An increase in the velocity of money.

Question 74

What is the demand for money?

A)The same as the demand for income.
B)It is made up of the transactions demand plus asset demand.
C)It is made up of the transactions demand minus asset demand.
D)Whatever the Bank of Canada determines it to be.

Question 75

If real GDP is $600 billion,the price level is 1.2 and the velocity of money is 5,then what is the money supply?

A)$100 billion.
B)$3,600 billion.
C)$144 billion.
D)$2,500.
E)It cannot be determined from the information.

Question 76

What is the equation of exchange?

A)MV = PQ.
B)Y = AE.
C)M = 1/RR.
D)C + I + X_n + G = Y.
E)MQ = PV.

Question 77

What is the effect of an increase in the money supply?

A)It will lower the interest rate.
B)It will increase the interest rate.
C)It will decrease the demand for money.
D)It will decrease the quantity of investment spending.

Question 78

In the equation MV = PQ,what does Q stand for?

A)The quantity of goods and services sold.
B)The quantity of investment.
C)The quantity of money in circulation.
D)The quantity of domestic demand.
E)The quantity of consumption and investment.

Question 79

Suppose that an economy is experiencing an annual growth of real GDP of 5 percent,and the velocity of money is constant.In order to maintain price level stability what needs to occur?

A)Taxes must be increased by 5 percent,and/or government spending reduced by 5%.
B)A budget deficit of 5% would be required.
C)The money supply must be increased by 5% per year.
D)The money supply must be increased by more than 5% per year.
E)The money supply should be decreased by 5% per year.

Question 80

All of the following items,except one,are part of the equation of exchange.Which is the exception?

A)Real output.
B)The interest rate.
C)The money supply.
D)The velocity of money.
E)The price level.