Question 1

If the Fed wanted to target price stability, meaning zero inflation, why should it set a target rate of inflation of around one percent?

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Question 2

In what ways have financial innovations affected the demand for money?

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Question 3

Professor Milton Friedman stated that "inflation is a monetary phenomenon." What did he mean by this statement and what is the basis for this assertion?

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Question 4

What would the portfolio demand for money look like if it were graphed on a set of axes? What would each axis represent?

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Question 5

If the Fed wanted to keep inflation in check given the growth rate of the economy, how should they have responded to the financial innovations of the mid to late 1970s and early 1980s in terms of money growth?

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Question 6

Why do people hold money? Explain the reasons.

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Question 7

Is keeping money growth low when the central bank can accurately forecast real growth a guarantee that short-run inflation will not occur? Explain

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Question 8

If velocity of money is constant; real growth in the output of the economy is +2.5%; and inflation is 2.0%; what is the growth rate of money?

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Question 9

Assuming a constant nominal GDP, would the velocity of M1 equal the velocity of M2? Explain.

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Question 10

If the price of money is determined by supply and demand, what impact should a decrease in the supply of money (given steady money demand) have on the price of money and the rate of inflation?

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Question 11

If we consider the relationship between the opportunity cost of holding money and velocity that existed in the 1980s, if the Fed followed the same policymaking in the 1990s and 2000s, would they have achieved the desired results? Explain.

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Question 12

Why does the Fed have to be concerned with money growth even though their main focus seems to be on interest rates?

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Question 13

The CPI is a commonly used and closely watched measure of inflation. However, it has limitations. What are they?

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Question 14

What factors can cause the portfolio demand for money to increase?

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Question 15

How does money velocity contribute to the observation that in countries with high rates of inflation the inflation rate exceeds the rate of money growth?

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Question 16

Is variability in velocity more of a problem in high or low inflation countries? Explain.

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Question 17

The empirical evidence on the velocity of money, specifically M2, shows it to be relatively stable over the long run. Does this imply that monetary policymakers really should focus on the growth rate of money for economic stability?

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Question 18

Irving Fisher derived the quantity theory of money from the equation of exchange. What two assumptions did he make to derive the theory and what is the basic assertion of the theory?

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Question 19

Economists are fond of calculating measures of elasticity. If we calculate the income elasticity of money as the %ΔM / %ΔPY, where M is the quantity of money held and PY is nominal income, would you suspect the coefficient to be positive, negative or zero? Will the absolute value be greater or less than 1? Be sure to explain your choices.

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Question 20

The equation of exchange which is MV = PY is an identity, which means it is true by definition. If you think carefully, what variable in the equation by the way it is defined really makes the equation of exchange an identity?

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Quiz 20:Money Growth, Money Demand and Modern Monetary Policy