Question 1

Evidence suggests that a liquidity trap is possible when
A)real interest rates are at zero.
B)real interest rates are at or just above zero.
C)nominal interest rates are at zero.
D)nominal interest rates are at or just above zero.

Accepted Answer

In a liquidity trap, nominal interest rates are at or just above zero, but real interest rates (which take inflation into account) are still positive. This makes it difficult for monetary policy to stimulate the economy as cutting interest rates further is no longer able to stimulate demand.

Question 2

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.

Accepted Answer

Tobin's model suggests that people hold money as a store of wealth as a way of reducing risk. Holding money can provide a buffer against emergencies and unexpected events, reducing the risk associated with being without liquid assets.

Question 3

In the liquidity trap,the money demand curve
A)is horizontal.
B)is vertical.
C)is negatively sloped.
D)is positively sloped.

Accepted Answer

In a liquidity trap, the demand for money becomes perfectly elastic (horizontal) at a certain low interest rate, indicating that people are willing to hold unlimited amounts of cash because they do not expect any significant return from investments.

Question 4

The reason that economists are so interested in the stability of velocity is because if the demand for money is not stable,then steady growth of the money supply
A)is going to promote price stability at the expense of low unemployment.
B)is going to promote low unemployment at the expense of price stability.
C)is an ineffective way to conduct monetary policy.
D)can still be used to conduct monetary policy if the goal is price stability.

Accepted Answer

If the demand for money is not stable, then the relationship between money supply and economic activity becomes unpredictable. This makes it difficult for the central bank to use changes in the money supply to achieve its macroeconomic goals, such as price stability and low unemployment. Therefore, conducting monetary policy without a stable velocity of money is ineffective.

Question 5

In the liquidity trap a small change in interest rates produces ________ change in the quantity of money demanded.
A)a small
B)no
C)a proportionate
D)a very large

Accepted Answer

In a liquidity trap, a small change in interest rates produces a very large change in the quantity of money demanded, as people prefer to hold money rather than bonds due to the expectation that interest rates cannot fall further or are too low to compensate for the perceived risk of holding bonds.

Question 6

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.

Accepted Answer

Tobin's model introduces the idea of portfolio diversification, suggesting that individuals will hold a mix of assets (including money and bonds) to balance risk and return, rather than exclusively choosing one over the other as implied in Keynes's simpler model. This diversification reflects a more nuanced understanding of speculative demand for money.

Question 7

If there are economies of scale in the transactions demand for money,as income increases,money demand
A)increases proportionately.
B)increases less than proportionately.
C)increases more than proportionately.
D)does not change.

Accepted Answer

When there are economies of scale in the transactions demand for money, as income increases, money demand increases less than proportionately. This is because transaction costs (e.g. fees for bank transfers) do not increase proportionately with income, so people do not need to hold as much additional money as their income increases.

Question 8

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

Accepted Answer

The Baumol-Tobin model suggests that lower transaction costs (such as brokerage fees) make it cheaper to convert bonds into money and vice versa. This leads to a decrease in the demand for money (as people are more willing to hold bonds instead of money due to lower conversion costs) and an increase in the demand for bonds (as it becomes cheaper to buy and sell them).

Question 9

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.

Accepted Answer

The Baumol-Tobin analysis suggests that the transactions component of the demand for money is negatively related to the level of interest rates. This means that as interest rates rise, individuals and firms prefer to hold less money for transactions, as the opportunity cost of holding money increases. Therefore, they will try to minimize their money holdings and increase their use of credit or other payment methods.

Question 10

The absence of money illusion means that
A)as real income doubles,the demand for money doubles.
B)as interest rates double,the demand for money doubles.
C)as the money supply doubles,the demand for money doubles.
D)as the price level doubles,the demand for money doubles.

Accepted Answer

The absence of money illusion refers to the fact that individuals' perception of the value of money does not change with changes in the price level. Therefore, if the price level doubles, individuals will not necessarily demand twice as much money to maintain their purchasing power. As a result, the demand for money is not directly proportional to changes in the price level and option D is the correct choice. Option A is incorrect because real income and demand for money have an inverse relationship. Option B is incorrect because there is no direct relationship between interest rates and the demand for money. Option C is incorrect because the quantity theory of money suggests that the demand for money is directly proportional to the money supply.

Question 11

In a liquidity trap,monetary policy has ________ effect on aggregate spending because a change in the money supply has ________ effect on interest rates.
A)no;no
B)no;a large
C)no;a small
D)a large;a large

Accepted Answer

In a liquidity trap, interest rates are already at or near zero, which means that monetary policy cannot stimulate spending by further reducing interest rates. Therefore, a change in the money supply does not have any effect on interest rates or aggregate spending.

Question 12

In the liquidity trap,monetary policy
A)has a large impact on interest rates.
B)has a small impact on interest rates.
C)has no impact on interest rates.
D)has a proportionate impact on interest rates.

Accepted Answer

In a liquidity trap, interest rates are already very low and the demand for money is very high. In such a situation, monetary policy becomes largely ineffective in impacting interest rates as there is little room for further reduction in interest rates through open market operations or changes in reserve requirements. Hence, monetary policy has no impact on interest rates in a liquidity trap.

Question 13

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

Accepted Answer

The Baumol-Tobin analysis suggests that an increase in the brokerage fee for buying and selling bonds will cause the demand for money to increase, as people will hold more money to avoid frequent transactions that incur higher fees. Consequently, the demand for bonds will decrease because the higher transaction costs make bonds less attractive.

Question 14

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

Accepted Answer

In the Baumol-Tobin model, scale economies imply that an increase in real income increases the quantity of money demanded proportionately because a larger income necessitates larger transactions, requiring more cash to be held. On the other hand, an increase in the price level increases the quantity of money demanded less than proportionately because a higher price level means that each transaction requires more cash, but this effect is offset by a reduction in the number of necessary transactions due to the higher prices. Therefore, option C is the correct answer.

Question 15

In the Baumol-Tobin model,given that total costs for an individual equals  ,where T0 = monthly income,b = brokerage costs,and C = amount raised from each bond transaction,derive the so-called square root rule.

Accepted Answer

The answer of In the Baumol-Tobin model,given that total costs...

Question 16

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

Accepted Answer

The Baumol-Tobin model suggests that an increase in income or an increase in brokerage fees (transaction costs) increases the demand for money. Higher income increases transactions and thus the need for money, while higher brokerage fees make it more costly to convert securities into money, leading to holding more money.

Question 17

The evidence on the interest sensitivity of the demand for money suggests that the demand for money is ________ to interest rates,and there is ________ evidence that a liquidity trap exists.
A)sensitive;substantial
B)sensitive;little
C)insensitive;substantial
D)insensitive;little

Accepted Answer

The evidence suggests that the demand for money is sensitive to interest rates, as stated in the first part of the statement. However, there is little evidence to suggest that a liquidity trap exists, which rules out choices A and C. Therefore, the best answer is B.

Question 18

Describe what the liquidity trap is. Explain how it can be problematic for monetary policymakers.

Accepted Answer

The answer of Describe what the liquidity trap is. Explain...

Question 19

Comparing Tobin's model of the speculative demand for money with Keynesian speculative demand
A)both models imply that individuals hold only money or only bonds.
B)the Keynesian model implies individuals diversify their asset holdings,while the Tobin model predicts that individuals hold only money or only bonds.
C)the Tobin model implies individuals diversify their asset holdings,while the Keynesian model predicts that individuals hold only money or only bonds.
D)both models imply that individuals diversify their asset holdings.

Accepted Answer

Tobin's model suggests that individuals diversify their asset holdings between money and bonds based on their expectations of interest rate changes, unlike the Keynesian speculative demand for money, which posits that individuals choose between holding all money or all bonds based on their expectations of interest rate movements.

Question 20

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

Accepted Answer

The Baumol-Tobin model suggests that an increase in income leads to more transactions and thus a higher demand for money. Similarly, a decrease in the interest rate reduces the opportunity cost of holding money (as opposed to investing it), also increasing the demand for money.

Quiz 19: Quantity Theory, inflation and the Demand for Money

Evidence suggests that a liquidity trap is possible when

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

In the liquidity trap,the money demand curve

The reason that economists are so interested in the stability of velocity is because if the demand for money is not stable,then steady growth of the money supply

In the liquidity trap a small change in interest rates produces ________ change in the quantity of money demanded.

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

If there are economies of scale in the transactions demand for money,as income increases,money demand

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 .

The Baumol-Tobin analysis suggests that

The absence of money illusion means that

In a liquidity trap,monetary policy has effect on aggregate spending because a change in the money supply has effect on interest rates.

In the liquidity trap,monetary policy

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 .

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 .

In the Baumol-Tobin model,given that total costs for an individual equals ,where T0 = monthly income,b = brokerage costs,and C = amount raised from each bond transaction,derive the so-called square root rule.

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

The evidence on the interest sensitivity of the demand for money suggests that the demand for money is to interest rates,and there is evidence that a liquidity trap exists.

Describe what the liquidity trap is. Explain how it can be problematic for monetary policymakers.

Comparing Tobin's model of the speculative demand for money with Keynesian speculative demand

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