Question 1

The quantity demanded of money is negatively related to _____, and the demand for money is positively related to _____.

Accepted Answer

The quantity demanded of money is negatively related to the interest rate because as the interest rate increases, the opportunity cost of holding money increases, and people are willing to hold less money. The demand for money is positively related to real GDP because as the economy expands and income increases, the demand for money for transactions and investment purposes also increases.

Question 2

A high demand for money (as in Japan) would result from:

Accepted Answer

A high demand for money can be influenced by factors such as low crime rates, which make people feel safer holding cash, and a lack of infrastructure to accept non-cash payments, necessitating the use of cash for transactions.

Question 3

The federal funds rate is the interest rate on _____, and it is influenced by the _____.

Accepted Answer

The federal funds rate is the interest rate at which depository institutions lend reserve balances to other depository institutions overnight, on an uncollateralized basis. It is influenced by the Federal Open Market Committee (FOMC), which sets targets for the rate to help control monetary policy.

Question 4

The demand for money is higher in Japan than in the United States because:

Accepted Answer

When interest rates are lower, individuals and firms are less incentivized to keep their funds in bank accounts to earn interest, meaning they would rather spend the money instead. This leads to a lower demand for money. Thus, since Japanese interest rates are lower than those in the United States, the demand for money is higher in Japan.

Question 5

If the quantity of money demanded is $300 billion and the quantity of money supplied is $200 billion, then the interest rate will:

Accepted Answer

When the quantity of money demanded exceeds the quantity supplied, there is excess demand, which leads to an increase in the price of money - the interest rate. Therefore, the interest rate will rise in this scenario.

Question 6

Changes in _____ will NOT shift the money demand curve.

Accepted Answer

The money demand curve is solely based on the interest rate and its relationship with the demand for money. While inflation, real GDP, and aggregate price level can all impact the demand for money, they do not directly shift the money demand curve. Only changes in the interest rate will shift the money demand curve.

Question 7

Suppose that a typical basket of goods is now more expensive than it used to be. All else equal, we would expect:

Accepted Answer

When the price of goods increases, people generally need more money to purchase the same basket of goods they used to buy before. This means that the demand for money will shift outward, as people will need more money to conduct the same transactions they used to conduct with less money before.

Question 8

If the quantity of money demanded is $100 billion and the quantity of money supplied is $200 billion, then the interest rate will:

Accepted Answer

When the quantity of money demanded is less than the quantity of money supplied, there is an excess supply of money in the market. To get rid of this excess supply, lenders will reduce interest rates, which will encourage borrowers to take more loans, leading to an increase in spending and an increase in the quantity of money demanded. As a result, the interest rate will fall.

Question 9

The factors that could cause money demand to shift do NOT include:

Accepted Answer

Interest rates do not cause the money demand curve to shift; instead, they represent a movement along the money demand curve. Factors like real aggregate spending, institutional constraints, and transaction technologies can shift the demand for money by changing how much money people want to hold at any given interest rate.

Question 10

If the equilibrium interest rate in the money market is 5%, then at an interest rate of 2%, the quantity of money demanded is _____ than quantity of money supplied.

Accepted Answer

At an interest rate of 2%, the lower interest rate encourages people to borrow more and save less. As a result, the quantity of money demanded increases. However, at the lower interest rate, the quantity of money supplied decreases because people are less willing to save their money. Therefore, the quantity of money demanded is greater than the quantity of money supplied.

Question 11

Suppose that the economy enters a recession and real GDP falls. All else equal, we would expect:

Accepted Answer

During a recession, people tend to hold onto their money rather than spending it, which decreases the demand for money. As a result, the money demand curve shifts inward.

Question 12

The liquidity preference model uses the demand for and supply of money to determine:

Accepted Answer

The liquidity preference model, developed by John Maynard Keynes, emphasizes the importance of the demand for money as a determinant of the interest rate. The model argues that people hold money not only for transactions but also as a form of wealth. When the demand for money increases, ceteris paribus, the interest rate will also increase to encourage saving and discourage spending. Conversely, when the supply of money increases, ceteris paribus, the interest rate will decrease. Therefore, the liquidity preference model determines the interest rate through the interaction of the demand and supply of money, making choice (C) the correct answer.

Question 13

Which reason is NOT one for which the Japanese tend to keep large amounts of cash?

Accepted Answer

If banks have invested heavily in credit card technology, it would be a reason for the Japanese to use credit cards rather than keep cash, not the opposite. The other choices (B, C, D) are all reasons why the Japanese tend to keep large amounts of cash.

Question 14

A change in _____ does NOT shift the money demand curve.

Accepted Answer

The interest rate does not shift the money demand curve; instead, it moves along the curve because it represents the cost of holding money versus holding other assets. Changes in the price level, banking technology, and real GDP can shift the money demand curve by affecting the quantity of money people want to hold.

Question 15

According to the liquidity preference model, if the interest rate rises above its equilibrium value, the quantity demanded of nonmonetary interest-bearing financial assets _____, and this leads to a _____ in the interest rate.

Accepted Answer

When the interest rate rises above its equilibrium, the quantity demanded of nonmonetary interest-bearing financial assets increases because they become more attractive compared to holding money. This increased demand for such assets puts downward pressure on interest rates, leading them to fall back towards equilibrium.

Question 16

The demand curve for money will shift to the right because of a:

Accepted Answer

A rise in real GDP increases the demand for transactions, which in turn increases the demand for money, shifting the demand curve to the right.

Question 17

If the interest rate on CDs rises from 5% to 10%, the opportunity cost of holding money will _____ and the quantity demanded of money will _____.

Accepted Answer

The opportunity cost of holding money is the interest rate that could have been earned from investing in alternative assets such as CDs. If the interest rate on CDs increases, the opportunity cost of holding money also increases, as the potential return from investing in CDs is higher. Therefore, individuals will be less likely to hold onto money and will instead invest in CDs (or similar assets) to take advantage of the higher interest rate. This results in a decrease in the quantity demanded of money.

Question 18

In the liquidity preference model, the money supply is represented by a(n):

Accepted Answer

In the liquidity preference model, the money supply is represented by a vertical line because it is assumed to be fixed by the central bank, independent of the interest rate.

Question 19

The demand for money is higher in Japan than in the United States because:

Accepted Answer

Most stores in Japan not accepting credit cards means consumers need to carry more cash for daily transactions, increasing the demand for physical money.

Question 20

Every year more and more purchases are made with credit cards on the Internet. Given this trend, all else equal, we would expect:

Accepted Answer

As more purchases are made with credit cards, the need for holding physical money decreases, leading to a shift inward in the money demand curve.

Quiz 15: Monetary Policy

The quantity demanded of money is negatively related to _, and the demand for money is positively related to _.

A high demand for money (as in Japan) would result from:

The federal funds rate is the interest rate on _, and it is influenced by the _.

The demand for money is higher in Japan than in the United States because:

If the quantity of money demanded is $300 billion and the quantity of money supplied is $200 billion, then the interest rate will:

Changes in _____ will NOT shift the money demand curve.

Suppose that a typical basket of goods is now more expensive than it used to be. All else equal, we would expect:

If the quantity of money demanded is $100 billion and the quantity of money supplied is $200 billion, then the interest rate will:

The factors that could cause money demand to shift do NOT include:

If the equilibrium interest rate in the money market is 5%, then at an interest rate of 2%, the quantity of money demanded is _____ than quantity of money supplied.

Suppose that the economy enters a recession and real GDP falls. All else equal, we would expect:

The liquidity preference model uses the demand for and supply of money to determine:

Which reason is NOT one for which the Japanese tend to keep large amounts of cash?

A change in _____ does NOT shift the money demand curve.

According to the liquidity preference model, if the interest rate rises above its equilibrium value, the quantity demanded of nonmonetary interest-bearing financial assets _, and this leads to a _ in the interest rate.

The demand curve for money will shift to the right because of a:

If the interest rate on CDs rises from 5% to 10%, the opportunity cost of holding money will _ and the quantity demanded of money will _.

In the liquidity preference model, the money supply is represented by a(n) :

The demand for money is higher in Japan than in the United States because:

Every year more and more purchases are made with credit cards on the Internet. Given this trend, all else equal, we would expect: