Question 1

The absence of money illusion means that

Accepted Answer

Money illusion refers to the tendency of people to think in nominal terms rather than real terms. In the absence of money illusion, people would adjust their demand for money based on changes in the real value of money instead of the nominal value. Therefore, as the price level doubles, the demand for money doubles because people need more money to purchase the same amount of goods and services in real terms.

Question 2

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

Accepted Answer

If the demand for money is not stable, then changes in the money supply will have unpredictable effects on economic activity, making it difficult to use monetary policy to achieve specific goals such as price stability or low unemployment. Therefore, having a stable velocity of money is important for conducting effective monetary policy.

Question 3

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.

Accepted Answer

The evidence suggests that the demand for money is sensitive to interest rates, indicating that as interest rates increase, the demand for money decreases. There is also little evidence that a liquidity trap exists, meaning that even as interest rates approach zero, there will still be demand for money.

Question 4

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

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 5

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

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 6

In the liquidity trap,monetary policy

Accepted Answer

In the liquidity trap, interest rates are already very low and there is an excess supply of money which means that monetary policy, such as lowering interest rates, will have no effect on stimulating the economy. Therefore, the answer is C - has no impact on interest rates.

Question 7

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 ________.

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 8

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

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 9

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 ________.

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 10

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

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.

Question 11

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 12

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

Accepted Answer

In a liquidity trap, interest rates are already very low, so a further decrease in interest rates from an increase in the money supply would have no effect on aggregate spending. Therefore, monetary policy has no effect on aggregate spending.

Question 13

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 ________.

Accepted Answer

In the Baumol-Tobin model, scale economies imply that the cost of making transactions decreases as the size of the transaction increases. Therefore, an increase in real income would lead to larger transactions, which would require a smaller proportion of income to be spent on transaction costs. As a result, the quantity of money demanded would increase less than proportionately with an increase in real income. On the other hand, an increase in the price level would increase the cost of transactions, leading to a higher demand for money to cover those costs. This means that the quantity of money demanded would increase proportionately with an increase in the price level. Thus, the correct answer is C.

Question 14

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

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 15

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 how...

Question 16

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

Accepted Answer

Tobin's model suggests that people hold money for speculative purposes, i.e., as a form of investment. Holding money can help reduce risk by providing a cushion against unexpected expenses or changes in income. Holding money can also help reduce the transaction cost of converting other assets into cash when needed. However, avoiding taxes or reducing income are not the primary reasons for holding money as a store of wealth.

Question 17

The Baumol-Tobin analysis suggests that

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. In other words, as interest rates increase, individuals and firms may choose to hold less cash for transactions because it becomes relatively more expensive to do so. Therefore, the theory implies that the demand for money is responsive to changes in interest rates.

Question 18

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

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 19

In the liquidity trap,the money demand curve

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 20

Evidence suggests that a liquidity trap is possible when

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.

Quiz 22: Quantity Theory, inflation and the Demand for Money

The absence of money illusion means that

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

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.

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

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

In the liquidity trap,monetary policy

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 .

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

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 for money,either an increase in or a decrease in increases money demand.

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

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 .