Question 1

Examples of inflation hedges include ________.

Accepted Answer

Real return bonds are specifically designed to protect against inflation by adjusting their principal and interest payments based on changes in the Consumer Price Index. This makes them an effective inflation hedge. The stock market, bonds, and currency may offer some level of protection against inflation, but they are not specifically designed for that purpose.

Question 2

Inflation hedges ________.

Accepted Answer

Inflation hedges are assets that have real returns that are less affected by inflation. They are typically investments in assets such as commodities, real estate, and inflation-indexed bonds, all of which have the potential to maintain or increase their value in times of inflation. Choices B, C, and D are incorrect because they do not accurately describe inflation hedges.

Question 3

Financial innovation will ________ and ________.

Accepted Answer

The answer of Financial innovation will ________ and ________.
...

Question 4

Describe the factors that affect the demand for money.

Accepted Answer

The answer of Describe the factors that affect the demand...

Question 5

Keynes's model of the demand for money suggests that velocity is ________ related to ________.

Accepted Answer

The answer of Keynes's model of the demand for money...

Question 6

The Keynesian demand for real balances can be expressed as ________.

Accepted Answer

The Keynesian demand for real balances assumes that individuals hold money for the purpose of transaction (i.e. to facilitate buying and selling). Therefore, the demand for real balances is a function of both the interest rate (i) and income (Y). Choice D expresses this relationship as Mᵈ/P = f(i,Y), where Mᵈ is the demand for money, P is the price level, and f() represents a function of the variables in the parenthesis.

Question 7

Keynes's liquidity preference theory indicates that the demand for money is ________ related to ________.

Accepted Answer

According to Keynes's liquidity preference theory, the demand for money is inversely related to interest rates. As interest rates increase, the opportunity cost of holding money increases, which leads to a decrease in the demand for money. Conversely, as interest rates decrease, the opportunity cost of holding money decreases, which leads to an increase in the demand for money.

Question 8

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. However, there is little evidence that a liquidity trap exists, indicating that the demand for money is not completely insensitive to interest rates.

Question 9

Explain the speculative motive for holding money in Keynes's liquidity preference theory.

Accepted Answer

The answer of Explain the speculative motive for holding money...

Question 10

Keynes's model of the demand for money suggests that velocity is ________.

Accepted Answer

The answer of Keynes's model of the demand for money...

Question 11

Currency and chequable deposits are said to be ________.

Accepted Answer

The answer of Currency and chequable deposits are said to...

Question 12

There are ________ factors that affect the demand for money.

Accepted Answer

The answer of There are ________ factors that affect the...

Question 13

The theory of portfolio choice says that the demand for an asset is ________ related to ________.

Accepted Answer

The theory of portfolio choice suggests that the demand for an asset is positively related to wealth, meaning as an investor's wealth increases, they are more likely to demand more of an asset.

Question 14

Explain the precautionary motive for holding money in Keynes's liquidity preference theory.

Accepted Answer

The answer of Explain the precautionary motive for holding money...

Question 15

Keynes's liquidity preference theory indicates that the demand for money is ________.

Accepted Answer

According to Keynes's liquidity preference theory, the demand for money is negatively related to interest rates. As interest rates increase, the opportunity cost of holding money increases, so people will want to hold less of it and instead invest in other assets that offer higher returns. Conversely, as interest rates decrease, the opportunity cost of holding money decreases, so people will want to hold more of it.

Question 16

Money is extremely safe ________.

Accepted Answer

Money is extremely safe in real terms because its value remains constant over time, even when inflation or changes in currency exchange rates occur. In other words, the purchasing power of money stays the same regardless of external factors. Nominal terms refer to the face value of money, which can fluctuate due to inflation or currency devaluation, making it less safe. Money is also less safe relative to inflation hedges, such as stocks, real estate, or commodities, which can generate higher returns and protect against inflation. Currency safety is relative to other currencies, and it depends on factors such as economic stability, political climate, and interest rates. Therefore, A is the best choice as it provides a more accurate description of money safety.

Question 17

Explain the transactions motive for holding money in Keynes's liquidity preference theory.

Accepted Answer

The answer of Explain the transactions motive for holding money...

Question 18

Explain the Keynesian theory of money demand. What motives did Keynes think determined money demand? What are the two reasons why Keynes thought velocity could not be treated as a constant?

Accepted Answer

The answer of Explain the Keynesian theory of money demand....

Question 19

Because interest rates have substantial fluctuations, the ________ theory of the demand for money indicates that velocity has substantial fluctuations as well.

Accepted Answer

The liquidity preference theory, proposed by John Maynard Keynes, suggests that the demand for money is mainly determined by people's desire to hold liquid assets (money) to meet unexpected expenses or to take advantage of investment opportunities. As interest rates change, people may either increase or decrease their desire to hold money, causing velocity (the number of times money changes hands in a given period) to fluctuate correspondingly. The classical theory assumes that velocity is mainly determined by the supply of money, while the Cambridge equation assumes that velocity is stable in the long run. The Pigouvian theory focuses on the role of externalities in the economy, rather than money demand or velocity.

Question 20

Keynes's liquidity preference theory indicates that the demand for money ________.

Accepted Answer

Keynes's liquidity preference theory indicates that the demand for money is a function of both income and interest rates. As income increases, the demand for money increases. As interest rates increase, the demand for money decreases since people prefer to invest their money instead of holding onto it in cash.

Quiz 20: Quantity Theory, Inflation, and the Demand for Money