Question 1

In 2005-2006, the Fed increased interest rates in an attempt to halt inflation.What was the most likely effect of raising interest rates on velocity?

Accepted Answer

The answer of In 2005-2006, the Fed increased interest rates...

Question 2

As we approached the end of the millennium, many economic crackpots advised citizens to hold large quantities of cash in anticipation of Y2K disasters.What effect would this have had on velocity if many people had been foolish enough to follow this advice?

Accepted Answer

If people were holding onto large quantities of cash, this would decrease the velocity of money as less money would be circulating in the economy. Velocity is a measure of how quickly money is flowing through the economy, so any increase or decrease in the amount of money being held in cash would have an effect on velocity.

Question 3

Velocity can be computed with the formula

Accepted Answer

The answer of Velocity can be computed with the formula
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Question 4

The reason that velocity increases when interest rates rise is

Accepted Answer

When interest rates rise, the opportunity cost of holding money increases because the return on savings accounts, bonds, and other interest-bearing assets also increases. As a result, people tend to hold smaller cash balances and use their money more quickly, which leads to an increase in velocity.

Question 5

How will an increase in the efficiency of the payments mechanism effect velocity?

Accepted Answer

An increase in the efficiency of the payments mechanism means that transactions can be processed faster and with less hassle, leading to an increase in the frequency of transactions. This will result in an increase in velocity, because velocity is calculated as the total value of transactions in an economy divided by the money supply.

Question 6

Economists observed the following growth rates in the fourth quarter of 1995: real GDP = 2.8 percent; M₁ = 7.8 percent; GDP Deflator = 2.2 percent.Given this data, the growth of nominal GDP was approximately

Accepted Answer

The answer of Economists observed the following growth rates in...

Question 7

When something happens to the economy, monetarists ask two questions:

Accepted Answer

Monetarists are primarily concerned with the money supply and its effect on the economy. They believe that changes in the money supply and velocity (how quickly money is circulating) have the biggest impact on real GDP and the price level. Therefore, they ask what happens to the money supply and velocity when something happens to the economy.

Question 8

When analyzing how money affects income, we are analyzing the way in which a

Accepted Answer

Money, in this context, is considered a stock (a quantity measured at one point in time), and income is a flow (a quantity measured over a period of time). Therefore, analyzing how money affects income is analyzing how a stock affects a flow.

Question 9

Many banks offer accounts featuring "Automatic Transfer from Savings" allowing customers to overdraw checking accounts and the bank will transfer enough funds to cover the check automatically.Most likely, what is the effect of this feature on velocity?

Accepted Answer

The "Automatic Transfer from Savings" feature allows customers to overdraw their checking accounts without any interruption in transactions. This means that money is continuing to move through the economy at a faster rate, increasing the velocity. Therefore, the correct answer is B, it will increase.

Question 10

What is the effect on velocity if payments are made more often?

Accepted Answer

Velocity is calculated as the total value of transactions divided by the money supply. If payments are made more often, the total value of transactions will increase while the money supply remains constant. This will cause an increase in velocity.

Question 11

Which of the following will tend to increase velocity?

Accepted Answer

The answer of Which of the following will tend to...

Question 12

Which of the following would tend to decrease velocity?

Accepted Answer

The answer of Which of the following would tend to...

Question 13

In the short run, an increase in the quantity of money normally

Accepted Answer

The answer of In the short run, an increase in...

Question 14

Monetarists maintain that

Accepted Answer

The answer of Monetarists maintain that
...

Question 15

Which one of the following will cause velocity to increase?

Accepted Answer

The answer of Which one of the following will cause...

Question 16

Following an anticapitalist coup, Freedonia forces all citizens to turn in and stop using all credit cards.What is the most likely effect of this on velocity?

Accepted Answer

Velocity is equal to the total value of transactions divided by the money supply. If citizens are no longer able to use credit cards, then their ability to make transactions will decrease, which will lead to a decrease in the total value of transactions. As a result, velocity will decrease.

Question 17

Economists observed the following growth rates in the fourth quarter of 1995: real GDP = 2.8 percent; M₁ = 7.8 percent; GDP Deflator = 2.2 percent.Given this data, the growth of velocity was approximately

Accepted Answer

The equation of exchange is M₁V = GDP Deflator * Real GDP. Rearranging this equation to solve for velocity V, we get V = (GDP Deflator * Real GDP) / M₁. Substituting the given values for real GDP, M₁, and GDP Deflator, we get:
V = (2.2 / 100) * (2.8 / 100) / (7.8 / 100)
V ≈ -0.028 or -2.8%
Therefore, the growth of velocity was approximately -2.8 percent.

Question 18

If financial news broadcasts reported that inflation was likely to rise significantly next year, what would most likely happen to the velocity of circulation?

Accepted Answer

The answer of If financial news broadcasts reported that inflation...

Question 19

In the second quarter of 1995, the following values were observed: real GDP = 4,359.3 billion; GDP Deflator = 325.1; and M₁ = 989.5.What is the value of velocity?

Accepted Answer

Velocity is calculated as nominal GDP divided by the money supply (M₁). Nominal GDP is real GDP multiplied by the GDP Deflator (in this case, 4,359.3 * 325.1). Then, divide this by M₁ (989.5) to find the velocity.

Question 20

The principal factor determining velocity is the

Accepted Answer

The answer of The principal factor determining velocity is the
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Quiz 32: The Debate over Monetary and Fiscal Policy