Question 1

In the United States over the last decade, the velocity of

Accepted Answer

The correct answer is D, as M2 has been more stable than the velocity of M1, possibly due to the deregulation of the interest paid on checkable deposits. This has led the Federal Reserve to shift their focus towards targeting M2 as a way to control the money supply. Therefore, choice D is the best answer. Choices A, B, C, and E are not accurate because they do not reflect the current situation of M1 and M2 velocity in the United States.

Question 2

The behavior of the M1 velocity of money in recent years can be explained by

Accepted Answer

Financial innovation has created new substitutes for money M1, such as electronic payment systems and credit cards, which have reduced the need for cash and checking account deposits, leading to a decrease in the velocity of money.

Question 3

The velocity of money increases for all of the following reasons except

Accepted Answer

Decreased use of credit cards would actually decrease the velocity of money, as it would mean people are using less credit and making fewer transactions. All of the other options (use of electronic transmission, charge accounts, ATMs, and inflation) would increase the velocity of money by making transactions faster, easier, or more frequent.

Question 4

If the Fed had to choose between fixing the interest rate and fixing the supply of money, it would

Accepted Answer

The best choice would be neither alternative because both fixing the interest rate and fixing the supply of money have potential drawbacks and limitations. Fixing the interest rate may lead to misallocation of resources and inefficient investment decisions, while fixing the supply of money may not be effective in controlling inflation if there are fluctuations in money demand. Instead, the Fed should use a combination of tools, such as adjusting reserve requirements, open market operations, and the discount rate, to achieve its dual mandate of price stability and full employment.

Question 5

Historical evidence has shown that the M1 velocity of money in the United States

Accepted Answer

Historical evidence shows that the M1 velocity of money in the United States has varied over the century and has recently fluctuated quite a bit. This indicates that the velocity of money is not constant and can be affected by changes in economic conditions and policies.

Question 6

The velocity of money is defined as

Accepted Answer

The velocity of money is the number of times a unit of currency is spent on goods and services per unit of time. Choice C defines exactly that, making it the correct answer. Choice A is irrelevant, as it refers to the travel time of a worker to deposit a paycheck. Choice B is partially correct, as certain banking processes do affect the velocity of money; however, it is not a definition of the concept. Choice D is a formula used to calculate the money supply and is not a definition of velocity of money. Choice E is incorrect, as it lists only certain types of transactions and does not cover all possible ways money can be spent.

Question 7

If something causes the velocity of money to increase, the same amount of money will

Accepted Answer

An increase in the velocity of money means that money is changing hands more frequently, which allows the same amount of money to support more transactions. This can lead to an increase in nominal GDP as more goods and services are being produced and sold.

Question 8

If the Fed is targeting the money supply, it loses control over the interest rate.

Accepted Answer

When the Fed targets the money supply, it sets a specific quantity of money in the economy. However, the interest rate is determined by the demand for and supply of money in the market. Therefore, if the Fed tries to control the money supply, it may not be able to control the interest rate.

Question 9

The velocity of M1 money has moved erratically in the past several years because

Accepted Answer

The answer of The velocity of M1 money has moved...

Question 10

A rising rate of inflation

Accepted Answer

A rising rate of inflation reduces the purchasing power of money, making it less valuable as a store of value. As a result, people are less likely to hold onto money and more likely to spend it quickly, which increases the velocity of money.

Question 11

Which of the following statements about the velocity of money in the U.S. is correct?

Accepted Answer

The answer of Which of the following statements about the...

Question 12

There is considerable disagreement about whether the Fed should

Accepted Answer

There is ongoing debate about whether the Fed should target interest rates or the money supply, often referred to as "monetary targeting." Those who favor targeting the money supply argue that controlling the amount of money in circulation is essential for controlling inflation and maintaining stable economic growth. Those who favor targeting interest rates argue that interest rates are a more direct tool for stimulating or slowing economic activity. However, in recent years, the Fed has shifted towards targeting interest rates, as it is seen as a more flexible and adaptable tool for managing the economy.

Question 13

Which of the following would cause an increase in the velocity of money?

Accepted Answer

Increased use of credit cards promotes more frequent transactions, leading to a higher velocity of money.

Question 14

Velocity will be higher

Accepted Answer

Velocity is the rate at which money is exchanged in an economy. If money is less effective as a store of value, people are more likely to spend it quickly rather than hold on to it. This increases the frequency at which money changes hands, thus raising velocity.

Question 15

Economic theory suggests that

Accepted Answer

According to the Quantity Theory of Money, a rapid growth in the money supply (assuming other factors are held constant) leads to a proportional increase in the price level. Therefore, option C is the correct choice. Option A is partially correct, but it suggests a causal relationship between the money supply and inflation (without holding other factors constant), whereas the Quantity Theory of Money explains that the relationship is proportional, not causal. Option B is incorrect because it suggests that a higher price level causes higher inflation, which is not necessarily true according to economic theory. Options D and E are incorrect because they are extreme statements and do not reflect the nuanced relationship between money supply and the inflation rate.

Question 16

Suppose that the demand and supply of money are initially in equilibrium, and that the demand for money increases. A monetary authority interested in keeping the money supply constant and the interest rate low must

Accepted Answer

The answer of Suppose that the demand and supply of...

Question 17

Which of the following would most likely lower the velocity of money?

Accepted Answer

The answer of Which of the following would most likely...

Question 18

Historically, hyperinflations have ended when monetary authorities

Accepted Answer

Historically, hyperinflations have ended when monetary authorities convinced the public that they were committed to halting the rapid growth of the money supply. This is because hyperinflation is caused by an excessive increase in the money supply, and if the public believes that the monetary authorities are committed to stopping this increase, they will be more likely to hold onto their money and not spend it quickly, which can help to stabilize prices. Options A, B, D, and E are not accurate as solutions to end hyperinflation.

Question 19

Increases in the expected inflation rate cause

Accepted Answer

An increase in expected inflation leads to people wanting to spend money more quickly before it loses value, which results in an increase in the velocity of money.

Question 20

Suppose the money demand curve shifts rightward. Which of the following is true about the Fed's options?

Accepted Answer

The answer of Suppose the money demand curve shifts rightward....

Quiz 16: Monetary Theory and Policy