Deck 20: Money Demand

Question 1

The theory of the demand for money described originally by Friedman is often called the liquidity preference theory.

Answer 1

False

Question 2

Interest rates have a larger impact on money demand in Keynes's view compared to Friedman's.

Answer 2

True

Question 3

According to Friedman's model, an increase in the yield on bonds increases the demand for money, ceteris paribus.

Answer 3

False

Question 4

Baumol and Tobin discussed how interest rates are inversely related to the transactions demand for money.

Question 5

According to the Friedman theory, if the difference between the return on stocks and money rises, the demand for real money balances will rise.

Question 6

If the price level rises, the demand for real money balances rises.

Question 7

The quantity equation of money supply is not true if velocity is not constant.

Question 8

Strictly speaking, the supply of money increases with interest rates, since banks lend more at higher rates.

Question 9

MV/P is a measure of real GDP.

Question 10

A great uncle you did not know existed leaves you $100,000 in his will. Keynes would predict that the transactions demand for money will increase.

Question 11

According to the Friedman theory, if the difference between expected inflation and the return on money falls, the demand for money will rise.

Question 12

Income has an impact on money demand in both Keynes's and Friedman's approach to money demand.

Question 13

In Friedman's view, velocity follows a random walk.

Question 14

In Friedman's theory, the return on money varies and increases above zero.

Question 15

When interest rates are low, people expect them to rise.

Question 16

Interest rates and the speculative demand for money are inversely related.

Question 17

In Keynes's theory of money demand, interest rates have opposite effects on precautionary and speculative demand for money.

Question 18

The precautionary motive of holding money implies that money demand falls with a decrease in interest rates.

Question 19

Velocity is the number of times a year a unit of currency is used for transactions.

Question 20

In Keynes's view, income affects money demand for both precautionary and speculative reasons.

Question 21

Credit cards could be one reason that velocity is higher today than a few decades ago.

Question 22

During the period 1790-1834, the velocity of dollars rose as the U.S. government paid off its debt.

Question 23

People holding money in anticipation that bond yields will rise is an example of

A) money demand for transactions.
B) precautionary demand.
C) speculative demand.
D) none of the above.

Question 24

If the return on stocks falls by 2% and the return on money falls by 2%, the predictions of Keynes's and Friedman's models of money demand would be the same, ceteris paribus.

Question 25

The use of efficient payment systems like electronic fund transfer in the United States led to an increase in the velocity of money.

Question 26

With the increasing use of online payments systems, velocity is expected to fall in the future.

Question 27

The yield and expected return on a bond are the same if the bond is held to maturity.

Question 28

The stability of velocity broke down in the 1970s.

Question 29

Central banks have no influence during a liquidity trap.

Question 30

Baumol and Tobin discuss how a(n) _____ in interest rates can decrease the _____ demand for money.

A) increase, transactions
B) decrease, transactions
C) increase, speculative
D) decrease, precautionary

Question 31

According to Friedman, the returns on stocks and money tend to move in opposite directions.

Question 32

Friedman's theory of money demand is more complex than Keynes's.

Question 33

According to both Keynes and Friedman, the demand for money decreases with a decrease in

A) permanent income.
B) the interest rate.
C) the spread between the interest rates on bonds and money.
D) the return on bonds minus the return on money.

Question 34

People holding money in case they need to fix their car is an example of

A) money demand for transactions.
B) precautionary demand.
C) speculative demand.
D) none of the above.

Question 35

In Keynes's model, a(n) _____ in interest rates can decrease the _____ demand for money.

A) increase, transactions
B) decrease, transactions
C) increase, speculative
D) decrease, speculative

Question 36

Now that Keynes's and Friedman's models have been shown to be insufficient explanations of money demand, the quantity theory has returned as the dominant model.

Question 37

Before 1970, the quantity of money in circulation moved closely with nominal GDP.

Question 38

Higher national debt leads to higher velocity, since bonds serve as a substitute for money for some purposes.

Question 39

According to William Baumol and James Tobin, the precautionary demand for money is _____ related to interest rates, and the speculative demand for money is _____ related to interest rates.

A) positively, positively
B) positively, negatively
C) negatively, positively
D) negatively, negatively

Question 40

If bond yields rise by 1% and the return on money rises by 1%, the predictions for the change in money demand made by Keynes's and Friedman's models are the same.

Question 41

According to Friedman, an increase in expected inflation causes the demand for money to _____, ceteris paribus.

A) increase
B) decrease
C) stay the same
D) cannot be determined

Question 42

If a central bank does not have full control of the supply of money, supply is ____ on a graph of the supply and demand for money.

A) upward sloping
B) downward sloping
C) vertical
D) horizontal

Question 43

Which of the following is a difference between Keynes liquidity preference theory and the modern quantity theory of money?

A) The modern quantity theory of money specifies 1 asset instead of 3 assets like the liquidity preference theory.
B) The liquidity preference theory assumes the return on money to be 1, unlike the modern quantity theory of money.
C) The liquidity preference theory assumes velocity to be constant, unlike the modern quantity theory of money.
D) The modern quantity theory predicts that interest rate changes have little effect on money demand unlike the liquidity preference theory.

Question 44

According to Keynes, an increase in interest rates causes _____ in velocity, ceteris paribus.

A) an increase
B) a decrease
C) no change
D) cannot be determined

Question 45

Keynes's model of the demand for assumes that the _____ is zero.

A) interest rate
B) return on money
C) bond yield
D) none of the above

Question 46

According to whose model does velocity change with interest rates?

A) Friedman
B) Keynes
C) both of the above
D) neither of the above

Question 47

One determinant of money demand that Friedman considers but Keynes does not is

A) the return on money.
B) the return on stocks.
C) the yield on bonds.
D) all of the above.

Question 48

According to Friedman, an increase in interest rates causes _____ in velocity, ceteris paribus.

A) an increase
B) a decrease
C) no change
D) cannot be determined

Question 49

Money demand became more sensitive to changes in interest rates starting in the

A) 1970s.
B) 1980s.
C) 1990s.
D) 2000s.

Question 50

According to whose model does expected inflation tend to move with the return on money?

A) Friedman
B) Keynes
C) both of the above
D) neither of the above

Question 51

Velocity was notably unstable starting in the

A) 1920s.
B) 1940s.
C) 1960s.
D) none of the above.

Question 52

According to _____ model, changes in income affect the demand for money.

A) Friedman's
B) Tobin's
C) Baumol's
D) Hamilton's

Question 53

Which of the following is equivalent to velocity?

A) MV/PY
B) YP/M
C) MP/Y
D) none of the above

Question 54

A liquidity trap occurs when

A) money demand falls.
B) inflation is zero.
C) nominal interest rates are zero.
D) all of the above.

Question 55

One determinant of money demand that Friedman considers but Keynes does not is

A) output.
B) the return on stocks.
C) the unemployment rate.
D) none of the above.

Question 56

According to Friedman, a decrease in expected inflation would not affect the demand for money if the _____ fell by the same amount.

A) return on stocks
B) return on bonds
C) return on money
D) none of the above

Question 57

Velocity was notably unstable starting in the

A) 1930s.
B) 1940s.
C) 1950s.
D) none of the above.

Question 58

Which of the following spreads does NOT enter Friedman's equation for money demand?

A) r_b - r_m
B) r_b - r_s
C) r_s - r_m
D) They all enter Friedman's equation.

Question 59

Which of the following spreads enters Friedman's equation for money demand?

A) r_b - r_m
B) $\pi$ ^e - r_m
C) r_s - r_m
D) They all enter Friedman's equation.

Question 60

According to Keynes, income affects the _____ demand for money.

A) precautionary
B) speculative
C) financial
D) none of the above

Question 61

A lump sum tax cut gives taxpayers a one-time reduction. Why would such policy imply a greater change in money demand in Keynes's framework than Friedman's?

Question 62

Write the quantity equation for money identifying all the variables.

Question 63

Which of the following could explain an increase in velocity?

A) credit cards
B) wire transfers
C) cash management accounts
D) all of the above

Question 64

What are the differences between the modern quantity theory of money and Keynes' liquidity preference theory?

Question 65

What is the velocity of a dollar?

Question 66

How does a falling interest rate affect speculative demand?

Question 67

Solve the quantity equation for money demand to find an expression for velocity. Explain the meaning of velocity using your equation.

Question 68

According to Friedman's theory, how would money demand change during the stock market bubble and collapse?

Question 69

If the yields (and expected return) on bonds fall, what else would be necessary for Friedman's and Keynes's theories of money demand to have the same qualitative prediction?

Question 70

According to Friedman's model, what is the one factor directly related to money demand?

Question 71

According to Friedman's theory, how would an increase in oil prices, which is both inflationary and recessionary, affect money demand?

Question 72

What are the three motivations, identified by Keynes, for holding money?

Question 73

According to Keynes, income affects money demand through what two motivations?

Question 74

What happened during the 1970s that caused Friedman's monetary theory to crack?

Question 75

In the 1990s, the volatility of velocity was _____ when compared with the 1960s.

A) more persistent
B) more predictable
C) lower
D) all of the above

Question 76

Explain why Friedman believed that the demand for money was not very sensitive to interest rates even the returns on stocks, bonds and money appear in his demand function.

Question 77

Explain the difference between the quantity theory and the liquidity preference theory in their implication about velocity.

Question 78

In the 19970s, what became harder to predict?

A) velocity
B) output
C) inflation
D) all of the above