Question 1

What would cause the total demand for money to shift to the left?

Accepted Answer

A decrease in nominal GDP would lead to a decrease in the total demand for money because people would have less money to spend in the economy. As a result, they would hold less money in their wallets and savings accounts, which would shift the demand for money to the left.

Question 2

On a diagram with the interest rate on the vertical axis and the quantity of money on the horizontal axis,how can the transactions demand for money be shown?

Accepted Answer

B

Question 3

What does the term transactions demand for money refer to?

Accepted Answer

Transactions demand for money refers to the demand for money by the public in order to effect transactions, such as buying goods and services or paying bills. It is based on the need for money to facilitate everyday transactions. The other options are not related to this concept.

Question 4

Which is true of the demand for money?

Accepted Answer

The demand for money is made up of two components: transactions demand and asset demand. Transactions demand is the need for money to make purchases and pay for expenses, while asset demand is the desire to hold money as an investment.

Answer: D
 The demand for money is determined by real income, which is the amount of goods and services that can be purchased with a given amount of money. As real income rises, the demand for money also increases as people have more funds to allocate toward transactions and investments.

Therefore, both options B and D are correct.

Question 5

Why is the asset demand for money curve downward-sloping?

Accepted Answer

When interest rates increase, the opportunity cost of holding money also increases because people could earn higher returns by investing in interest-bearing assets. Therefore, people will demand less money at higher interest rates, resulting in a downward-sloping asset demand for money curve.

Question 6

What determines the supply of money?

Accepted Answer

The supply of money is determined by the Bank of Canada through its monetary policy decisions, such as setting interest rates and adjusting the amount of money that is printed and circulated in the economy. While factors such as the demand for money, interest rates, velocity of money, and level of nominal income can impact the overall economy and influence monetary policy decisions, they do not directly determine the supply of money.

Question 7

Which of the following is inversely related to the interest rate?

Accepted Answer

According to the quantity theory of money, when the interest rate is high, people will demand less asset money (such as stocks and bonds) and instead choose to hold more of their wealth in liquid form, such as cash or checking deposits. This means that the quantity of asset money demanded is inversely related to the interest rate.

Question 8

On a diagram with the interest rate on the vertical axis and the quantity of money demanded on the horizontal axis,what can the asset demand for money be shown as?

Accepted Answer

Asset demand for money is the demand for money as a store of value or an asset. As the interest rate increases, the opportunity cost of holding money increases, and therefore the quantity of money demanded decreases. This relationship is shown as a downwards sloping curve on the diagram.

Question 9

The asset demand for money is most closely related to which function of money?

Accepted Answer

The function of money as a store of wealth is closely related to the asset demand for money. This refers to the desire of individuals and firms to hold money as a way to preserve the value of their wealth over time. When people hold money as an asset, they give up the opportunity to earn interest or returns on other investments. Therefore, the demand for money as a store of wealth is influenced by interest rates, inflation expectations, and overall economic conditions.

Question 10

Which of the following is true regarding the opportunity cost of holding money?

Accepted Answer

Opportunity cost refers to the cost of choosing one option over another. Holding money instead of investing it comes with an opportunity cost in the form of foregone interest income. As the rate of interest increases, the opportunity cost of holding money also increases, making it more attractive to invest rather than hold money. Therefore, option A is true.

Question 11

On a diagram with the interest rate on the vertical axis and the quantity of money demanded on the horizontal axis,how can the total demand for money be obtained?

Accepted Answer

The total demand for money in an economy is obtained by adding the transactions demand (money needed for everyday transactions) and the asset demand (money held as a store of value) horizontally. This is because both demands are functions of the quantity of money people want to hold at different interest rates, and adding them horizontally reflects the total quantity of money demanded at each interest rate.

Question 12

What results if the quantity of money demanded exceeds the quantity supplied?

Accepted Answer

If the quantity of money demanded exceeds the quantity supplied, there will be excess demand for money, leading to an increase in the rate of interest as borrowers compete with each other to obtain funds. Therefore, the correct choice is E - "The rate of interest will increase."

Question 13

Which of the following statements is correct?

Accepted Answer

A decrease in prices leads to a decrease in the transactions demand for money as fewer units of currency are needed for transactions. Additionally, the lower prices lead to a decrease in the total demand for money as people hold onto less money for the same level of transactions. Therefore, both the transactions demand and total money demand curves shift to the left. None of the other statements are correct.

Question 14

What the term asset demand for money refer to?

Accepted Answer

Asset demand for money refers to the desire to hold money as a store of wealth instead of investing it in other types of assets. This is because money is liquid and can be used to make purchases or investments in the future.

Question 15

In which direction will the transaction demand for money curve shift?

Accepted Answer

The transaction demand for money curve shifts right when nominal GDP increases because people need more money for transactions as the economy grows.

Question 16

Which of the following statements is correct regarding an interest rate above equilibrium?

Accepted Answer

When the interest rate is above the equilibrium, it means that the price of borrowing money is higher than what many people are willing to pay. As a result, fewer people will borrow money, leading to a surplus of money in the money market because the supply of money exceeds the demand at that higher interest rate.

Question 17

The desire of people to hold money as a medium of exchange describes what type of money demand?

Accepted Answer

The transactions demand for money is the desire of people to hold money as a medium of exchange, to facilitate transactions in the economy. The asset demand for money refers to the desire of people to hold money as a store of value or an asset, while investment demand refers to the desire of individuals and firms to invest in assets such as stocks and bonds for the purpose of generating income or capital gains. The velocity of circulation refers to the number of times that a unit of money changes hands in a given period of time in the economy.

Question 18

The desire of people to hold money as a store of wealth describes what type of money demand?

Accepted Answer

The desire of people to hold money as a store of wealth describes the asset demand for money, which is one of the three types of money demand. The other two types are the transactions demand for money and the speculative demand for money.

Question 19

If both the demand for money and the supply of money increase,what can we conclude will happen to the equilibrium?

Accepted Answer

When both the demand for money and the supply of money increase, the quantity of money in the economy will increase because there is more money being supplied and demanded. However, the effect on the interest rate is indeterminate without knowing the relative magnitudes of the changes in demand and supply.

Question 20

When can we be certain that the quantity of money demanded will decrease?

Accepted Answer

According to the quantity theory of money, the demand for money is proportional to nominal GDP. Therefore, if nominal GDP decreases, the demand for money should also decrease. Additionally, the quantity theory of money implies that the demand for money varies inversely with the interest rate. Hence, if the interest rate increases, the demand for money should decrease. Therefore, the combination of a decrease in nominal GDP and an increase in the interest rate should result in a decrease in the quantity of money demanded.

Quiz 9: The Money Market and Monetary Policy