Question 1

Which of the following is true?

Accepted Answer

A) The demand for real balances increases more than proportionately with real income. 
B) The demand for real balances increases less than proportionately with real income. 
C) The demand for real balances decreases as real income increases. 
D) The demand for real balances is unaffected by changes in real income. 
A) The demand for real balances increases more than proportionately with real income. 
B) The demand for real balances increases less than proportionately with real income. 
C) The demand for real balances decreases as real income increases. 
D) The demand for real balances is unaffected by changes in real income.

Question 2

An important distinction between Friedman's and Keynes' view of money demand was that

Accepted Answer

A) Friedman thought that interest rates had a larger effect than Keynes. 
B) Friedman thought that interest rates had a smaller effect than Keynes. 
C) Keynes emphasized the effect of expected average lifetime income. 
D) Friedman assumed the return on money was zero. 
A) Friedman thought that interest rates had a larger effect than Keynes. 
B) Friedman thought that interest rates had a smaller effect than Keynes. 
C) Keynes emphasized the effect of expected average lifetime income. 
D) Friedman assumed the return on money was zero.

Question 3

Keynes referred to the effect of portfolio allocation decisions on the demand for money as the

Accepted Answer

A) interest motive. 
B) transactions motive. 
C) precautionary motive. 
D) speculative motive. 
A) interest motive. 
B) transactions motive. 
C) precautionary motive. 
D) speculative motive.

Question 4

The liquidity preference theory was developed by

Accepted Answer

A) James Tobin. 
B) Milton Friedman. 
C) John Maynard Keynes. 
D) William Baumol. 
A) James Tobin. 
B) Milton Friedman. 
C) John Maynard Keynes. 
D) William Baumol.

Question 5

Divisa aggregates

Accepted Answer

A) are another name for weighted aggregates. 
B) differ from weighted aggregates in that they do not include components of M1. 
C) weight the inflation rate, as well as monetary aggregates. 
D) provide a poor fit when estimating money demand equations. 
A) are another name for weighted aggregates. 
B) differ from weighted aggregates in that they do not include components of M1. 
C) weight the inflation rate, as well as monetary aggregates. 
D) provide a poor fit when estimating money demand equations.

Question 6

People use money primarily

Accepted Answer

A) to carry out transactions. 
B) as a measure of their income. 
C) as a measure of their wealth. 
D) as an asset in their portfolios. 
A) to carry out transactions. 
B) as a measure of their income. 
C) as a measure of their wealth. 
D) as an asset in their portfolios.

Question 7

In the Baumol-Tobin view, an increase in interest rates will cause individuals to hold

Accepted Answer

A) larger money balances, and velocity will increase. 
B) larger money balances, and velocity will decrease. 
C) smaller money balances, and velocity will increase. 
D) smaller money balances, and velocity will decrease. 
A) larger money balances, and velocity will increase. 
B) larger money balances, and velocity will decrease. 
C) smaller money balances, and velocity will increase. 
D) smaller money balances, and velocity will decrease.

Question 8

The premise of the quantity theory of money demand is

Accepted Answer

A) only gold and silver coins have value. 
B) it is only the quantity of money, and not its quality, that counts. 
C) the most obvious reason that households and businesses demand money is for use in making transactions. 
D) the store of value function of money is more important than the medium of exchange function of money. 
A) only gold and silver coins have value. 
B) it is only the quantity of money, and not its quality, that counts. 
C) the most obvious reason that households and businesses demand money is for use in making transactions. 
D) the store of value function of money is more important than the medium of exchange function of money.

Question 9

Most of the collapse in M2 growth during the early 1990s can be explained by

Accepted Answer

A) high inflation rates. 
B) the drop in the amount of small time deposits. 
C) a movement out of currency and into checking account deposits. 
D) a movement out of checking account deposits and into currency. 
A) high inflation rates. 
B) the drop in the amount of small time deposits. 
C) a movement out of currency and into checking account deposits. 
D) a movement out of checking account deposits and into currency.

Question 10

If credit card companies imposed a per purchase charge for using their cards,

Accepted Answer

A) money balances would fall, and the velocity of money would rise. 
B) money balances would rise, and the velocity of money would fall. 
C) both money balances and the velocity of money would fall. 
D) both money balances and the velocity of money would rise. 
A) money balances would fall, and the velocity of money would rise. 
B) money balances would rise, and the velocity of money would fall. 
C) both money balances and the velocity of money would fall. 
D) both money balances and the velocity of money would rise.

Question 11

The tendency of individuals to hold money to pay for unexpected transactions is known as

Accepted Answer

A) speculative motive. 
B) precautionary motive. 
C) conditional motive. 
D) Keynesian motive. 
A) speculative motive. 
B) precautionary motive. 
C) conditional motive. 
D) Keynesian motive.

Question 12

The correct expression for the equation of exchange is

Accepted Answer

A) PV = MY. 
B) VY = MP. 
C) MV = PY. 
D) M/P = VY. 
A) PV = MY. 
B) VY = MP. 
C) MV = PY. 
D) M/P = VY.

Question 13

According to Irving Fisher, the demand for real money balances should

Accepted Answer

A) be constant. 
B) equal the reciprocal of velocity. 
C) be proportional to the level of real transactions. 
D) equal the price level multiplied by the volume of real transactions. 
A) be constant. 
B) equal the reciprocal of velocity. 
C) be proportional to the level of real transactions. 
D) equal the price level multiplied by the volume of real transactions.

Question 14

Real money balances equal

Accepted Answer

A) MP. 
B) M/P. 
C) P/M. 
D) nominal money balances. 
A) MP. 
B) M/P. 
C) P/M. 
D) nominal money balances.

Question 15

Holding everything else constant, the increased use of credit cards in recent years probably

Accepted Answer

A) increased M1 velocity. 
B) decreased M1 velocity. 
C) did not affect M1 velocity. 
D) caused nominal balances to rise more slowly than real balances. 
A) increased M1 velocity. 
B) decreased M1 velocity. 
C) did not affect M1 velocity. 
D) caused nominal balances to rise more slowly than real balances.

Question 16

Transactions velocity

Accepted Answer

A) was rejected by Irving Fisher as the correct definition of velocity in the quantity theory of money demand. 
B) is much smaller than the value of velocity obtained from dividing GDP by the money stock. 
C) is much smaller than the value of velocity obtained from dividing the money stock by GDP. 
D) is much larger than the value of velocity obtained from dividing GDP by the money stock. 
A) was rejected by Irving Fisher as the correct definition of velocity in the quantity theory of money demand. 
B) is much smaller than the value of velocity obtained from dividing GDP by the money stock. 
C) is much smaller than the value of velocity obtained from dividing the money stock by GDP. 
D) is much larger than the value of velocity obtained from dividing GDP by the money stock.

Question 17

Which of the following central banks continues to emphasize the growth of the money supply in its conduct of monetary policy?

Accepted Answer

A) The Fed 
B) ECB 
C) Both the Fed and ECB 
D) Neither the Fed nor the ECB 
A) The Fed 
B) ECB 
C) Both the Fed and ECB 
D) Neither the Fed nor the ECB

Question 18

Friedman's expression for the demand for real balances is

Accepted Answer

A) M/P = L(Y, i - iM, πe - iM). 
B) M/P = L(Y, i). 
C) M/P = L(Y, iM - i, πe - iM). 
D) M/P = L(Y, i - iM, iM - πe). 
A) M/P = L(Y, i - iM, πe - iM). 
B) M/P = L(Y, i). 
C) M/P = L(Y, iM - i, πe - iM). 
D) M/P = L(Y, i - iM, iM - πe).

Question 19

In order to convert the equation of exchange into a theory of money demand, we need to rewrite it as

Accepted Answer

A) V = PY/M. 
B) M/P = (1/V)Y. 
C) M = PY/V. 
D) P/M = V/Y. 
A) V = PY/M. 
B) M/P = (1/V)Y. 
C) M = PY/V. 
D) P/M = V/Y.

Question 20

The equation of exchange is an identity because

Accepted Answer

A) it has been shown empirically to hold in many different times and places. 
B) it defines the money supply to be equal to currency plus checkable deposits. 
C) of the way velocity is defined. 
D) the price level is assumed to be constant. 
A) it has been shown empirically to hold in many different times and places. 
B) it defines the money supply to be equal to currency plus checkable deposits. 
C) of the way velocity is defined. 
D) the price level is assumed to be constant.

Exam 23: The Demand for Money

Which of the following is true?

An important distinction between Friedman's and Keynes' view of money demand was that

Keynes referred to the effect of portfolio allocation decisions on the demand for money as the

The liquidity preference theory was developed by

Divisa aggregates

People use money primarily

In the Baumol-Tobin view, an increase in interest rates will cause individuals to hold

The premise of the quantity theory of money demand is

Most of the collapse in M2 growth during the early 1990s can be explained by

If credit card companies imposed a per purchase charge for using their cards,

The tendency of individuals to hold money to pay for unexpected transactions is known as

The correct expression for the equation of exchange is

According to Irving Fisher, the demand for real money balances should

Real money balances equal

Holding everything else constant, the increased use of credit cards in recent years probably

Transactions velocity

Which of the following central banks continues to emphasize the growth of the money supply in its conduct of monetary policy?

Friedman's expression for the demand for real balances is

In order to convert the equation of exchange into a theory of money demand, we need to rewrite it as

The equation of exchange is an identity because

Introducing Money and the Financial System

Money and the Payments System

Overview of the Financial System

Interest Rates and Rates of Return

The Theory of Portfolio Allocation

Determining Market Interest Rates

Risk Structure and Term Structure of Interest Rates

The Foreign-Exchange Market and Exchange Rates

Derivative Securities and Derivative Markets

Information and Financial Market Efficiency

Reducing Transactions Costs and Information Costs

What Financial Institutions Do

The Business of Banking

The Banking Industry

Banking Regulation: Crisis and Response

Banking in the International Economy

The Money Supply Process

Changes in the Monetary Base

Organization of Central Banks

Monetary Policy Tools

The Conduct of Monetary Policy

The International Financial System and Monetary Policy

Linking the Financial System and the Economy: the Is-Lm-Fe Model

Aggregate Demand and Aggregate Supply

Money and Output in the Short Run

Information Problems and Channels for Monetary Policy

Inflation: Causes and Consequences

Filters