Question 1

If something causes the velocity of money to increase,the same amount of money will
A)be able to support more transactions,so nominal GDP can increase
B)be forced to support more transactions,so nominal GDP will decrease
C)be able to support fewer transactions,so nominal GDP will decrease
D)no longer have to support so many transactions,so nominal GDP can increase
E)mean nothing can happen to nominal GDP

Accepted Answer

When the velocity of money increases, it means that each unit of money is being exchanged more frequently for goods and services. This, in turn, leads to an increase in the number of transactions within the economy. As a result, the same amount of money can support more transactions, leading to an increase in nominal GDP.

Question 2

The velocity of money is defined as
A)the time it takes the average worker to get to the bank with his/her paycheck
B)the time it takes banks to clear checks
C)the average number of times per year each dollar is used to purchase final goods and services
D)M $\times$ P ÷ Y
E)the average number of times per year each dollar is spent for goods,payrolls,Social Security payments,etc.

Accepted Answer

The velocity of money is the average number of times per year each dollar is used to purchase final goods and services, which is defined as MV = PQ where M is the money supply, V is the velocity of money, P is the price level, and Q is real output.

Question 3

Historical evidence has shown that the M1 velocity of money in the United States
A)has remained constant
B)has remained predictable but not constant
C)has varied over the century but is currently near constant
D)has varied over the century and has recently fluctuated a quite a bit
E)is not correctly placed within the equation of exchange

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 is due to changes in consumer preferences, technological advances, and shifts in the economy.

Question 4

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 limits the availability of funds in the economy, which can cause interest rates to rise or fall beyond the Fed's intended target. This is because the demand for money by households, businesses, and banks can affect the interest rate, regardless of the Fed's policy stance. Therefore, targeting the money supply can lead to a loss of control over interest rates.

Question 5

For interest rates to remain stable during economic expansions,the growth rate of the money supply should
A)exceed the growth in the demand for money
B)just match the growth in the demand for money
C)be less than the growth in the demand for money
D)be zero
E)just match the growth in nominal GDP

Accepted Answer

If the growth rate of the money supply just matches the growth in the demand for money, then interest rates are likely to remain stable during economic expansions. If the growth rate of the money supply exceeds the growth in the demand for money, then there will be an increase in inflation and possibly higher interest rates. If the growth rate of the money supply is less than the growth in the demand for money, then there will be a decrease in inflation and possibly lower interest rates. If the growth rate of the money supply is zero, then it could lead to a decrease in economic activity and possibly deflation. Matching the growth in the demand for money helps to maintain stability in the economy while also avoiding inflation and deflation. Matching the growth in nominal GDP could also be an option, but it is not as precise as matching the growth in the demand for money.

Question 6

If interest rates are to remain constant,the money supply should change
A)in the opposite direction to a change in aggregate demand
B)in the same direction as a change in money demand
C)only when investment changes
D)only when the demand for money decreases
E)only when the inflation rate changes

Accepted Answer

If interest rates are to remain constant, the money supply should change in the same direction as a change in money demand. This means that if there is an increase in the demand for money, the money supply should also increase to meet that demand, so as to keep interest rates constant. Conversely, if there is a decrease in the demand for money, the money supply should also decrease to prevent interest rates from rising.

Question 7

Suppose the money demand curve shifts rightward.Which of the following is true about the Fed's options?
A)The Fed can keep the interest rate from rising only if it increases the money supply.
B)The Fed cannot prevent the interest rate from rising.
C)The Fed can prevent the interest rate from rising without changing the money supply.
D)If the Fed expands the money supply,the interest rate will rise even further.
E)The Fed should reduce the money supply if it wishes to prevent the interest rate from rising.

Accepted Answer

To prevent the interest rate from rising when the money demand curve shifts rightward, the Fed can increase the money supply to meet the higher demand for money, thus keeping interest rates stable.

Question 8

In the United States over the last decade,the velocity of
A)M1 has been more stable than the velocity of M2,possibly because of the deregulation of the interest paid on checkable deposits
B)M1 has been more stable than the velocity of M2,leading the Fed to rely more on M1 targets
C)M2 has been more stable than the velocity of M1,but the Fed still relies on M1 targets
D)M2 has been more stable than the velocity of M1,possibly because of the deregulation of the interest paid on checkable deposits
E)both c and d are true

Accepted Answer

According to the context, the velocity of M2 has been more stable than the velocity of M1 over the last decade in the United States, possibly because of the deregulation of the interest paid on checkable deposits. Therefore, choice D is the correct answer. Choice A is incorrect because it suggests that the stability of M1 velocity has to do with deregulation, which is not supported by the passage. Choice B is incorrect because it suggests that M1 velocity is more stable than M2 velocity, which is the opposite of what is stated in the passage. Choice C is also incorrect because it suggests that the Fed relies on M1 targets despite the stability of M2 velocity, which is not stated in the passage. Choice E is incorrect because only option D is true according to the passage.

Question 9

If the Fed had to choose between fixing the interest rate and fixing the supply of money,it would
A)always fix the money supply,so that the price level would be stable
B)always fix the money supply,so that spending would be stable
C)always fix the interest rate,so that investment would be stable
D)always fix the interest rate,so that demand for money would be stable
E)find neither alternative would be clearly better than the other

Accepted Answer

The best choice would be neither alternative as both have potential drawbacks and limitations. Fixing the supply of money could lead to inflexibility in responding to changing economic conditions, while fixing the interest rate may not be effective in controlling inflation or promoting economic growth. The optimal approach for the Fed would be to use a combination of tools, such as adjusting the reserve requirement or conducting open market operations, to achieve its goals of price stability, full employment, and sustainable economic growth.

Question 10

Those who argue against interest rate targets for monetary policy claim that
A)the necessary changes in money supply reinforce business cycles
B)the necessary changes in money supply dampen expansions
C)increased crowding out reduces private investment even more
D)inflation would fall
E)monetary policy is too effective

Accepted Answer

Those who argue against interest rate targets for monetary policy claim that the necessary changes in money supply reinforce business cycles, which may not be desirable as it can cause increased economic instability.

Question 11

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
A)increase the money supply
B)decrease the money supply
C)increase the demand for money
D)decrease the demand for money
E)give up pursuing both goals at the same time and choose one or the other

Accepted Answer

Keeping the money supply constant while also keeping interest rates low is not possible if the demand for money increases, as this would typically lead to higher interest rates. The authority must choose between maintaining the money supply or keeping interest rates low.

Question 12

The behavior of the M1 velocity of money in recent years can be explained by
A)stability of interest rates
B)a low and stable rate of inflation
C)monetary policy that has been successful in stabilizing the economy
D)financial innovation creating new substitutes for money M1
E)a large number of banks and savings and loan associations going bankrupt

Accepted Answer

Financial innovation creating new substitutes for money M1 has led to a decrease in the velocity of M1 in recent years. Consumers and businesses are using alternative forms of payment such as credit cards, electronic transfers, and online payment systems instead of physical currency and checking accounts.

Question 13

If the Fed targets the interest rate,then
A)the money supply will grow at a more controlled rate
B)monetary policy will reinforce fluctuations in economic activity
C)the price level will be more stable in the long run
D)money demand will be more stable
E)velocity will be less stable

Accepted Answer

When the Fed targets the interest rate, it adjusts the money supply to maintain that target rate. This can lead to reinforcing fluctuations in economic activity because in times of economic boom, the Fed might lower interest rates to prevent overheating, which can further boost economic activity, and in times of recession, it might reduce rates to stimulate the economy, potentially leading to more pronounced cycles.

Question 14

For interest rates to remain stable during economic expansions,the money supply should
A)decrease at a faster rate than the demand for money
B)grow at the same rate as money demand
C)grow at a faster rate than money demand
D)grow at a slower rate than money demand
E)decrease at a slower rate than the demand for money

Accepted Answer

If the money supply grows at the same rate as money demand during economic expansions, interest rates will remain stable. If the money supply grows at a faster rate than money demand, there will be too much money in the system and interest rates will decrease. If the money supply decreases at a faster rate than the demand for money, there will be too little money in the system and interest rates will increase. If the money supply grows at a slower rate than money demand, there will be a shortage of money, which will cause interest rates to rise. And if the money supply decreases at a slower rate than the demand for money, there will be a surplus of money which will cause interest rates to fall. Therefore, option B is the best choice.

Question 15

The velocity of money increases for all of the following reasons except
A)use of electronic transmission of funds
B)increased use of charge accounts
C)increased use of automatic teller machines
D)a rising inflation rate
E)decreased use of credit cards

Accepted Answer

The increased use of credit cards would lead to an increase in the velocity of money as it allows for faster and more convenient transactions. Therefore, decreased use of credit cards would not increase the velocity of money.

Question 16

Which of the following statements about the velocity of money in the U.S.is correct?
A)From 1915 to 1947,the velocity of M1 increased.
B)From 1947 to 1973,the velocity of M1 decreased.
C)In the 1970s,velocity growth was extremely stable at approximately 3% to 4%.
D)During most of this century,the velocity of money has remained unchanged.
E)The velocity of money has decreased because of ATM machines and credit cards.

Accepted Answer

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

Question 17

For interest rates to remain stable during economic contractions,monetary authorities should
A)reduce the demand for money
B)increase the demand for money
C)match the rate of growth in the money supply to the rate of growth in nominal GDP
D)reduce the rate of growth in the money supply below the rate of growth in the demand for money
E)slow the growth of the money supply,or even let the money supply shrink

Accepted Answer

The answer of For interest rates to remain stable during...

Question 18

A rising rate of inflation
A)makes people more willing to hold money as an asset
B)reduces the usefulness of money as a store of value and thus increases the velocity of money
C)increases the usefulness of money as a medium of exchange and thus reduces the velocity of money
D)is usually preceded by a reduction in the money supply
E)does not,apparently,have any effect on the velocity of money

Accepted Answer

Inflation reduces the purchasing power of money, making it less useful as a store of value. As a result, people may try to spend their money quickly before it loses even more value, and thus the velocity of money increases.

Question 19

The velocity of M1 money has moved erratically in the past several years because
A)of low and stable rates of inflation
B)of regulatory changes allowing banks to pay interest on checkable deposits
C)interest rates have been stable
D)monetary policy has been highly erratic
E)a large number of banks and savings and loan associations have gone bankrupt

Accepted Answer

Regulatory changes allowing banks to pay interest on checkable deposits can affect the velocity of M1 money by influencing how quickly money circulates in the economy, as these changes can alter the demand for holding money.

Question 20

There is considerable disagreement about whether the Fed should
A)engage in open market operations
B)have the power to set reserve requirements
C)reduce the money supply when the economy is growing
D)allow banks to invest in the stock market
E)attempt to control interest rates or should instead attempt to control the money supply

Accepted Answer

There is ongoing debate among economists about the most effective approach for the Fed to achieve its dual mandate of promoting maximum employment and price stability. However, many experts argue that the Fed should focus on controlling the money supply rather than interest rates. This approach, known as monetary targeting, involves setting specific targets for the growth of the money supply and adjusting policy actions accordingly. By contrast, relying on interest rate manipulation can be less effective, as changes in rates may not have the desired impact on spending and investment behavior. Therefore, the best choice is for the Fed to attempt to control the money supply.

Quiz 16: Monetary Theory and Policy

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

The velocity of money is defined as

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

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

For interest rates to remain stable during economic expansions,the growth rate of the money supply should

If interest rates are to remain constant,the money supply should change

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

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

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

Those who argue against interest rate targets for monetary policy claim that

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

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

If the Fed targets the interest rate,then

For interest rates to remain stable during economic expansions,the money supply should

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

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

For interest rates to remain stable during economic contractions,monetary authorities should

A rising rate of inflation

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

There is considerable disagreement about whether the Fed should