Question 1

Which one of the following will cause velocity to increase?

Accepted Answer

Increasing the efficiency of the payments system allows money to circulate more quickly, thereby increasing the velocity of money.

Question 2

As the price level rises, the demand for money

Accepted Answer

As the price level rises, the demand for money increases because more money is needed to carry out the same number of transactions, reflecting the higher cost of goods and services.

Question 3

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). First, calculate nominal GDP by multiplying real GDP by the GDP deflator (4,359.3 * 325.1 / 100 = 14,168.243). Then, divide nominal GDP by M1 (14,168.243 / 989.5 ≈ 14.32).

Question 4

Velocity can be computed with the formula

Accepted Answer

The answer of Velocity can be computed with the formula
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Question 5

The reason that velocity increases when interest rates rise is

Accepted Answer

When interest rates rise, the opportunity cost of holding money increases because individuals are able to earn a higher return by investing or saving their money elsewhere. This leads to a decrease in average money balances and an increase in the velocity of money (how quickly money is exchanged in an economy). Therefore, Choice D is the best option.

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 velocity was approximately

Accepted Answer

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

Question 7

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 8

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 9

The principal factor determining velocity is the

Accepted Answer

The answer of The principal factor determining velocity is the
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Question 10

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, which means that there will be more frequent transfers between the two accounts. This will increase the velocity of money because the same amount of money is being used more frequently in different transactions.

Question 11

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

Accepted Answer

An increase in the efficiency of the payments mechanism would mean that transactions can occur more quickly and with less friction. This would make it easier for individuals and businesses to exchange money and could result in an increase in the overall volume of economic activity. As a result, there could be an increase in the velocity of money, which measures the rate at which money is exchanged within an economy.

Question 12

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

The use of credit cards increases the speed of transactions in the economy, which in turn increases the velocity of money. By eliminating the use of credit cards, the number of transactions that can be completed will likely decrease, leading to a decrease in velocity.

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

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 15

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 many people had hoarded cash in anticipation of Y2K disasters, it would have decreased the velocity since the money would not be circulating in the economy. Velocity is the rate at which money changes hands in the economy, and hoarding cash would reduce the frequency of transactions, thus decreasing velocity.

Question 16

In 2007-2009, the Fed cut interest rates to limit the international financial crisis.What is the effect of this on velocity?

Accepted Answer

When interest rates decrease, borrowing becomes cheaper and people tend to borrow more to invest in various sectors, creating demand and increasing the money supply. This, in turn, lowers the demand for money and reduces velocity. Therefore, the correct choice is A) velocity will decrease.

Question 17

Which of the following would tend to decrease velocity?

Accepted Answer

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

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

If inflation is expected to rise, people are likely to spend money more quickly to avoid higher prices in the future, which would increase the velocity of circulation.

Question 19

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

Accepted Answer

Velocity is the number of times a unit of currency is spent in a given period. If payments are made more often, then the currency will exchange hands more frequently, increasing the velocity. Therefore, the correct answer is B, it will increase.

Question 20

The inflation rate in January of 2009 as measured by the CPI was zero.If inflation were to remain at zero for a long period, what would be the effect on velocity?

Accepted Answer

The answer of The inflation rate in January of 2009...

Quiz 32: The Debate Over Monetary and Fiscal Policy