Deck 11: Modeling Money

Question 1

One of the debatable assumptions on which the ATM model for the demand for cash is based on is that

A)money supply is constant.
B)individuals spend the same amount of money every day.
C)the ongoing rate of inflation is always greater than 10%.
D)cash held in banks do not attract interest.

Answer 1

B

Question 2

How much is someone who visits the ATM once every 7 days and has an average cash balance of $70 expected to spend daily?

A)$5
B)$10
C)$15
D)$20

Answer 2

D

Question 3

What is the average cash holdings of someone who visits the ATM once every 8 days and spends $25 on a daily basis?

A)$12.50
B)$25
C)$100
D)$200

Answer 3

C

Question 4

In the ATM model, if the nominal interest rate declines, then the

A)number of days between visits to the ATM and the quantity of money demanded both rise.
B)number of days between visits to the ATM and the quantity of money demanded both fall.
C)number of days between visits to the ATM rises and the quantity of money demanded falls.
D)number of days between visits to the ATM falls and the quantity of money demanded rises.

Question 5

In the ATM model, if the cost of going to an ATM increases,

A)the number of days between visits to the ATM rises and the quantity of money demanded falls.
B)the number of days between visits to the ATM falls and the quantity of money demanded rises.
C)both the number of days between visits to the ATM and the quantity of money demanded rises.
D)both the number of days between visits to the ATM and the quantity of money demanded falls.

Question 6

In the ATM model, if the probability of loss or theft decreases, then

A)the number of days between visits to the ATM rises and the quantity of money demanded falls.
B)the number of days between visits to the ATM falls and the quantity of money demanded rises.
C)both the number of days between visits to the ATM and the quantity of money demanded rises.
D)both the number of days between visits to the ATM and the quantity of money demanded falls.

Question 7

In the ATM model, the demand for money depends on

A)the nominal interest rate and the money supply.
B)the nominal interest rate and the ongoing rate of inflation.
C)the nominal interest rate, the cost of obtaining cash, the probability of loss or theft, and the money supply.
D)the nominal interest rate, the cost of obtaining cash, the probability of loss or theft, and the amount of spending.

Question 8

The cost of going to an ATM is $2 in an economy.If the nominal interest rate in the economy is 1 percent, what is the total cost associated with holding cash for an individual who spends $15 daily and has a 9 percent probability of having his cash lost or stolen? Assume that he visits the ATM once in every T days.

A)(365/T) + (0.75 × T)
B)(730/T) + (0.75 × T)
C)(730/T) + (1.5 × T)
D)(365/T) + (1.5 × T)

Question 9

If the cost of going to the ATM is $2 and the nominal interest rate is 1 percent, someone who has a 9 percent probability of having his cash lost or stolen and spends $15 each day will go to the ATM once in every ____ days approximately.

A)25
B)31
C)37
D)43

Question 10

Someone who has an average cash balance of $45 and spends $15 per day will visit the ATM once in every days.

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

Question 11

A variable that is determined outside a model is called a(n)

A)dynamic variable.
B)static variable.
C)endogenous variable.
D)exogenous variable.

Question 12

The nominal interest rate in an economy is 5 percent, and there is also a 15 percent probability of having cash lost or stolen in the economy.Given this information, what is the cost of going to the ATM for an individual who spends $10 daily and has a total cost of holding cash = (365/T) + T.Assume that the individual visits the ATM once in every T days.

A)$1
B)$2
C)$3
D)$4

Question 13

If the cost of going to the ATM in an economy is $1 and the nominal interest rate is 5 percent, someone who spends $10 each day and has the total cost of holding cash = (365/T) + T, has a _____stolen.Assume that the individual visits the ATM once in every T days.

A)5 percent
B)10 percent
C)15 percent
D)20 percent

Question 14

A variable that is determined within a model is called

A)a dynamic variable.
B)a static variable.
C)an endogenous variable.
D)an exogenous variable.

Question 15

If the nominal interest rate is 3 percent and the cost of going to the ATM is $1.50, someone who has a 12 percent probability of having his cash lost or stolen and has a total cost of holding cash equal to (547.50/T) + (0.375 × T) spends _____daily.Assume that the individual visits the ATM once in every T days.

A)$20
B)$15
C)$10
D)$5

Question 16

The cost of going to an ATM is $1 in an economy.If the nominal interest rate in the economy is 5 percent, what is the total cost associated with holding cash for an individual who spends $10 daily and has a 15 percent probability of having his cash lost or stolen? Assume that he visits the ATM once in every T days.

A)(182.5/T) + (0.2 × T)
B)(182.5/T) + (0.2 × T)
C)(365/T) + (0.5 × T)
D)(365/T) + T

Question 17

An individual spends $5 daily and also spends an additional $1.50 each time he goes to an ATM.There is also a 12 percent risk of having his cash lost or stolen.If his total cost of holding cash is (547.50/T) + (0.375 × T), then what is the ongoing nominal interest rate in the economy? Assume that the individual visits the ATM once in every T days.

A)1 percent.
B)2 percent.
C)3 percent.
D)4 percent.

Question 18

​In the ATM model of money, the opportunity cost of holding money is determined by

A)​the rate of inflation.
B)​the cost of going to an ATM.
C)​the charges levied on every ATM transaction.
D)​the nominal interest rate and the possibility of having her money stolen.

Question 19

In the ATM model of the demand for cash, if a person's daily amount of spending increases, then

A)the number of days between visits to the ATM falls and the quantity of money demanded rises.
B)the number of days between visits to the ATM rises and the quantity of money demanded falls.
C)both the number of days between visits to the ATM and the quantity of money demanded rises.
D)both the number of days between visits to the ATM and the quantity of money demanded falls.

Question 20

If the cost of going to the ATM is $1 and the nominal interest rate is 5 percent, someone who has a 15 percent probability of having his cash lost or stolen and spends $10 each day will go to the ATM once in every ____ days approximately.

A)10
B)13
C)16
D)19

Question 21

In the liquidity-preference model, a decrease in the money supply causes

A)the nominal interest rate to increase and the equilibrium quantity of money to decrease.
B)the nominal interest rate to increase and the equilibrium quantity of money to remain unchanged.
C)the nominal interest rate to decrease and the equilibrium quantity of money to remain unchanged.
D)both the nominal interest rate and the equilibrium quantity of money to decrease.

Question 22

In the liquidity-preference model, if the nominal interest rate is lower than the equilibrium interest rate

A)both bond prices and nominal interest rate will eventually fall further.
B)both bond prices and nominal interest rate will eventually rise.
C)bond prices will fall and nominal interest rate will eventually rise.
D)bond prices will rise and nominal interest rate will eventually fall further.

Question 23

In the liquidity-preference model, an increase in people's incomes causes the

A)money supply curve to shift to the right.
B)money supply curve to shift to the left.
C)money demand curve to shift to the left.
D)money demand curve to shift to the right.

Question 24

​Which of the following statements is true?

A)​The ATM model of money is a general­equilibrium model.
B)​The opportunity cost of holding money in the ATM model increases when the nominal interest rate declines.
C)In a general-equilibrium model, most of the key macroeconomic variables are exogenous.
D)​​Normally, results from a general equilibrium model can be applied to a wider range of problems than the results from a partial-equilibrium model.

Question 25

In the liquidity-preference model,

A)both the nominal interest rate and the price level in the economy are exogenous variables.
B)both the nominal interest rate and the price level in the economy are endogenous variables.
C)the nominal interest rate is an exogenous variable, while the price level in the economy is an endogenous variable.
D)the nominal interest rate is an endogenous variable, while the price level in the economy is an exogenous variable.

Question 26

In the liquidity-preference model, an increase in prices causes

A)both the nominal interest rate and the equilibrium quantity of money to decrease.
B)the nominal interest rate to increase and the equilibrium quantity of money to remain unchanged.
C)the nominal interest rate to decrease and the equilibrium quantity of money to remain unchanged.
D)both the nominal interest rate and the equilibrium quantity of money to increase.

Question 27

In the liquidity-preference model, a decline in prices causes the

A)money supply curve to shift to the right.
B)money supply curve to shift to the left.
C)money demand curve to shift to the left.
D)money demand curve to shift to the right.

Question 28

In the liquidity-preference model, the slope of the money supply curve implies that

A)money demand varies directly with the nominal interest rate.
B)money supply varies directly with the nominal interest rate.
C)nominal interest rate has no effect on the money demand.
D)nominal interest rate has no effect on the money supply.

Question 29

In the ATM model of the demand for cash

A)the amount that an individual withdraws is an exogenous variable while the probability of theft or loss is an endogenous variable.
B)the amount that an individual withdraws is an endogenous variable while the probability of theft or loss is an exogenous variable.
C)both the amount that an individual withdraws and the probability of loss and theft are exogenous variables.
D)both the amount that an individual withdraws and the probability of loss and theft are endogenous variables.

Question 30

​The nominal interest rate is

A)​endogenous in the ATM model, while it is exogenous in the liquidity­preference model.
B)​exogenous in the ATM model, while it is endogenous in the liquidity­preference model.
C)​endogenous in both the liquidity­preference and ATM model.
D)​exogenous in both the liquidity­preference and ATM model.

Question 31

In the liquidity-preference model, the nominal interest rate is represented on the vertical axis and the quantity of money is represented on the horizontal axis.Hence,

A)the money demand curve slopes downward and the money supply curve is vertical.
B)the money demand curve slopes upward and the money supply curve is horizontal.
C)both the money demand and money supply curve slope downward.
D)both the money demand and money supply curve slope upward.

Question 32

The liquidity-preference model assumes that the amount people spend depends on

A)their real incomes and the incomes of other people around them.
B)the cost of withdrawing money from an ATM.
C)the probability of theft and loss of money.
D)their real incomes and prices of goods and services.

Question 33

In the liquidity-preference model, a decrease in people's incomes causes

A)both the nominal interest rate and the equilibrium quantity of money to increase.
B)the nominal interest rate to increase and the equilibrium quantity of money to decrease.
C)the nominal interest rate to decrease and the equilibrium quantity of money to remain unchanged.
D)both the nominal interest rate and the equilibrium quantity of money to decrease.

Question 34

In the liquidity-preference model, if the nominal interest rate is higher than the equilibrium interest rate

A)both bond prices and nominal interest rate will eventually fall.
B)both bond prices and nominal interest rate will eventually rise further
C)bond prices will fall and nominal interest rate will eventually rise further
D)bond prices will rise and nominal interest rate will eventually fall.

Question 35

In the liquidity-preference model, an increase in the money supply causes

A)the nominal interest rate to increase and the equilibrium quantity of money to decrease.
B)the nominal interest rate to increase and the equilibrium quantity of money to remain unchanged.
C)the nominal interest rate to decrease and the equilibrium quantity of money to remain unchanged.
D)the nominal interest rate to decrease and the equilibrium quantity of money to increase.

Question 36

The model in which money demand and supply determine the nominal interest rate is known as the

A)liquidity-preference model.
B)ATM model.
C)aggregate money model.
D)monetarist model.

Question 37

In the ATM model of the demand for cash

A)both the nominal interest rate and the cost of going to an ATM are endogenous variables.
B)both the nominal interest rate and the cost of going to an ATM are exogenous variables.
C)the nominal interest rate is an exogenous variable while the average cash balances is an endogenous variable.
D)the nominal interest rate is an endogenous variable while the cost of going to an ATM is an exogenous variable.

Question 38

A general-equilibrium model is a model in which

A)all key macroeconomic variables are endogenous.
B)more than one key macroeconomic variable is exogenous.
C)only one macroeconomic variable is exogenous.
D)none of the key macroeconomic variables are endogenous.

Question 39

A partial-equilibrium model is a model in which

A)all key macroeconomic variables are endogenous.
B)some key macroeconomic variables are exogenous.
C)all key macroeconomic variables are discrete random variables.
D)none of the key macroeconomic variables are endogenous.

Question 40

The ATM model of the demand for cash is a

A)general-equilibrium model.
B)steady state model.
C)partial-equilibrium model.
D)no-equilibrium model.

Question 41

A steady state is a situation in which the key variables in the model

A)are constant or else growing at a constant rate.
B)are growing at a decreasing rate.
C)are endogenous.
D)measure zero.

Question 42

Suppose the money demand function is M^D = P × [(0.25 × Y) ? (100 × i)],
Where Y is expressed in billions of dollars and i is expressed in percentage points.If P = 2, Y = 5,000, and i = 5, then the nominal quantity of money demanded equals

A)750.
B)1,000.
C)1,500.
D)2,000.

Question 43

A model that does not allow variables to change over time is referred to as a

A)static model.
B)dynamic model.
C)partial-equilibrium model.
D)general-equilibrium model.

Question 44

​A steady state

A)​is a short­run equilibrium which describes what the exogenous variables in a model will do if they are not disturbed by any other variable in the model.
B)​​is a short­run equilibrium which describes what the endogenous variables in a model will do if they are not disturbed by any other variable in the model.
C)​is a long­run equilibrium which describes what the exogenous variables in a model will do if they are not disturbed by any other variable in the model.
D)​​is a long­run equilibrium which describes what the endogenous variables in a model will do if they are not disturbed by any other variable in the model.

Question 45

At the starting point of a dynamic model,

A)all variables measure zero.
B)key variables of a model are growing at a decreasing rate.
C)key variables of a model are growing at an increasing rate.
D)key variables in the model are constant or growing at a constant rate.

Question 46

Everything else remaining unchanged, if the price level in a country doubles, the quantity of money demanded

A)declines.
B)is unchanged.
C)doubles.
D)can increase or decline depending on the population of the concerned country.

Question 47

A change to a variable in a model that causes other variables to deviate from their long-run equilibrium values in the short run or in the long run is referred to as a

A)deviation.
B)shock.
C)standard deviation.
D)disequilibrium catalyst.

Question 48

In a dynamic model of money, if money supply and trend output is constant over time

A)nominal supply of money will increase, while nominal demand for money will be constant.
B)nominal supply of money will decrease, while nominal demand for money will be constant.
C)nominal supply of money will be constant, while nominal demand for money will decrease.
D)both the nominal supply of money and nominal demand for money will be constant.

Question 49

In expansions, according to the liquidity-preference model, the increase in ______leads to_____in the equilibrium nominal interest rate.

A)money supply; an increase
B)money supply; a decline
C)money demand; a decline
D)money demand; an increase

Question 50

A function that summarizes the relationship between the real demand for money, real income, and the nominal interest rate is called the ____function.

A)real money-demand
B)nominal money-demand
C)interest-income
D)real income-demand

Question 51

The liquidity-preference model of money is a

A)static general-equilibrium model.
B)dynamic general-equilibrium model.
C)static partial-equilibrium model.
D)dynamic partial-equilibrium model.

Question 52

Suppose the money demand function is M^D = P × [(0.25 × Y) ? (100 × i)],
Where Y is expressed in billions of dollars and i is expressed in percentage points.The term [(0.25 × Y) ? (100 × i)]
Is called

A)the nominal money-demand function.
B)the nominal money-supply function.
C)the real money-supply function.
D)the real money-demand function.

Question 53

In the dynamic model of money,

A)both people's income and money supply are endogenous variables.
B)both people's income and money supply are exogenous variables.
C)people's income is an endogenous variable, while money supply is an exogenous variable.
D)people's income is an exogenous variable, while money supply is an endogenous variable.

Question 54

The liquidity effect is the

A)direct relationship between money supply and the real interest rate.
B)proportional relationship between money supply and money demand.
C)direct relationship between nominal money supply and the real money supply.
D)inverse relationship between money supply and the nominal interest rate.

Question 55

An advantage of using the real­money demand function is that​ it is unaffected by changes in

A)geographical location.
B)​ruling political power.
C)​prices of goods and services.
D)​income of consumers.

Question 56

Suppose the money demand function is M^D = P × [(0.25 × Y) ? (100 × i)],
Where Y is expressed in billions of dollars and i is expressed in percentage points.If P = 2, Y = 5,000, and i = 5, then the real quantity of money demanded equals

A)750.
B)1,000.
C)1,500.
D)2,000.

Question 57

A model that allows variables to change over time is referred to as a

A)static model.
B)dynamic model.
C)partial-equilibrium model.
D)general-equilibrium model.

Question 58

In recessions, according to the liquidity-preference model, the decline in______leads to_____in the equilibrium nominal interest rate.

A)money supply; an increase
B)money supply; a decline
C)money demand; a decline
D)money demand; an increase

Question 59

In the dynamic model of money, an increase in the price level causes an increase in money demand, thus leading to a higher nominal interest rate.This effect is referred to as the

A)price-level effect.
B)income effect.
C)liquidity effect.
D)inflationary effect.

Question 60

Which of the following statements is true?

A)​In a static model, an economy is assumed to start at a point where all variables are constant.
B)​In the dynamic model of money, the longer prices take to adjust to shocks, the more long­lived is the liquidity effect.
C)​In the dynamic model of money, all variables are initially growing at an increasing rate but they eventually reach a steady state.
D)​Money supply is the only endogenous variable in the dynamic model of money.

Question 61

Describe three different changes in the ATM model that would increase the time between ATM visits and increase the quantity of money demanded.

Question 62

The income effect refers to the situation when a higher nominal interest rate results from a(n)

A)decrease in income that increases the demand for money.
B)increase in income that increases the demand for money.
C)increase in the price level that increases the demand for money.
D)decrease in the price level that increases the demand for money.

Question 63

Describe the standard equation used to describe the demand for money.In that equation, what would happen to the demand for money if prices were to double?

Question 64

The Friedman rule suggests that

A)the optimal nominal interest rate in an economy should be negative.
B)the optimal nominal interest rate in an economy should be positive.
C)the optimal nominal inflation rate in an economy should be positive.
D)the optimal nominal inflation rate in an economy should be negative.

Question 65

Suppose, the money-demand equation is given by
M^D = P × [(0.25 × Y) ? (15 × i)], where P is the price level, Y is the level of output in billions, and i is the interest rate in percentage points.Initially, P= 2, Y = $500, and i = 3.If Y rises to $600 and the price level does not change, by how much should the Fed change the money supply if it wants to keep the nominal interest rate unchanged? Should the money supply rise or fall, and by how much? Use the liquidity-preference framework and show a diagram of this situation.

Question 66

Assume that the nominal interest rate in an economy is 3 percent and the cost of going to the ATM is $1.50.You spend $5 each day, and there is also a 12 percent probability of having your cash lost or stolen.

a.What is your total cost of holding cash as a function of the number of days between trips to the ATM?
b.How often will you go to the ATM to minimize your costs?

Question 67

Regression analysis is a key method used in econometrics in which the coefficients of an equation are calculated by finding values for them that make the_______ as small as possible.

A)correlation
B)standard error
C)sum of the squared error terms
D)confidence interval

Question 68

What will happen to the nominal interest rate and the equilibrium quantity of money because of the following changes?

a.A decline in people's incomes
b.An increase in the level of prices
c.A decline in the supply of money

Question 69

In a dynamic model, what three key assumptions are needed to make the prices of goods and services endogenous?

Question 70

Describe in words the relationships established in the two equations used by the Federal Reserve to forecast the demand for M2.

Question 71

Suppose you have a 20 percent probability of having your cash lost or stolen, and you spend $25 each day.Your total cost of holding cash is (182.50/T) + (3.75 × T).
a.What is your cost of going to the ATM?
b.What is the nominal interest rate?
c.How often will you go to the ATM to minimize your costs?

Question 72

Econometrics is

A)a system of measuring economic variables.
B)the study of public finance.
C)the use of statistical techniques on economic data.
D)the use of mathematical techniques on economic data.

Question 73

Research by Laurence Ball showed that

A)the coefficients of money demand were smaller by half than what previous researchers had found.
B)nominal interest rates fell with an increase in money demand.
C)earlier researchers had estimated the money-demand function very precisely and their results held up when additional data was available.
D)increase in money supply can accelerate inflation.

Question 74

Consider the standard dynamic model of money in which the economy is in a steady state with constant levels of output, inflation, and the nominal interest rate.Suppose initially that the steady-state nominal interest rate is 4 percent, the steady-state inflation rate is 2% percent, and the growth rate of the money supply is 2 percent.How will an unanticipated permanent decline in the growth rate of the money supply to 0 percent affect the level of output, the inflation rate, and the nominal interest rate?

Question 75

Suppose the money demand function is
M^D = P × [(0.25 × Y) ? (100 × i)],
where Y is expressed in billions of dollars and i is expressed in percentage points.
a.Suppose that initially P = 2, Y = 5,000, and i = 5.If income rises to 6,000, what is the new equilibrium nominal interest rate?

b.Suppose that initially P = 3, Y = 4,000, and i = 7.If the price level falls to 2, what is the new equilibrium nominal interest rate?