Question 1

Milton Friedman first proposed his explanation of money demand in

Accepted Answer

A) the 1800s. 
B) the early 1900s. 
C) 1956. 
D) 1995. 
A) the 1800s. 
B) the early 1900s. 
C) 1956. 
D) 1995.

Question 2

Why do most standard academic models used by economists ignore money?

Accepted Answer

A) Money has been shown not to affect the economy. 
B) Money no longer affects inflation in the long run. 
C) The short-run link between money and inflation is fickle. 
D) No central bank pays attention to money anymore. 
A) Money has been shown not to affect the economy. 
B) Money no longer affects inflation in the long run. 
C) The short-run link between money and inflation is fickle. 
D) No central bank pays attention to money anymore.

Question 3

Which of the following statements is true concerning the velocity of M1?

Accepted Answer

A) It declined during most of the period from the late 1940s to 1980, but rose during the 1980s. 
B) It has increased during most of the period since the late 1940s. 
C) It has been roughly constant since the late 1940s. 
D) It declined during the 1980s. 
A) It declined during most of the period from the late 1940s to 1980, but rose during the 1980s. 
B) It has increased during most of the period since the late 1940s. 
C) It has been roughly constant since the late 1940s. 
D) It declined during the 1980s.

Question 4

Weighted monetary aggregates differ from traditional monetary aggregates in that they

Accepted Answer

A) weight included assets by their liquidity. 
B) weight all included assets equally. 
C) include a much broader range of assets. 
D) include a much narrower range of assets. 
A) weight included assets by their liquidity. 
B) weight all included assets equally. 
C) include a much broader range of assets. 
D) include a much narrower range of assets.

Question 5

Since 1965, the price level in the United States has

Accepted Answer

A) remained roughly the same. 
B) declined by about 50%. 
C) roughly doubled. 
D) more than quintupled. 
A) remained roughly the same. 
B) declined by about 50%. 
C) roughly doubled. 
D) more than quintupled.

Question 6

The quantity theory of money

Accepted Answer

A) included the interest rate, but did not include income as a factor in the demand for money. 
B) included income, but did not include the interest rate as a factor in the demand for money. 
C) did not include either income or the interest rate as factors in the demand for money. 
D) included both income and the interest rate as factors in the demand for money. 
A) included the interest rate, but did not include income as a factor in the demand for money. 
B) included income, but did not include the interest rate as a factor in the demand for money. 
C) did not include either income or the interest rate as factors in the demand for money. 
D) included both income and the interest rate as factors in the demand for money.

Question 7

If nothing else changes, a higher price level

Accepted Answer

A) increases the value of real money balances. 
B) leads to a proportionately higher nominal demand for money. 
C) leads to a proportionately lower nominal demand for money. 
D) decreases the value of nominal money balances. 
A) increases the value of real money balances. 
B) leads to a proportionately higher nominal demand for money. 
C) leads to a proportionately lower nominal demand for money. 
D) decreases the value of nominal money balances.

Question 8

An important difference between Keynes's approach to the demand for money and Friedman's approach is that

Accepted Answer

A) there is no role for the opportunity cost of holding money in Friedman's theory. 
B) in Keynes's theory, changes in output have no effect on the demand for money. 
C) in Friedman's theory, money demand responds only slightly to short-run fluctuations in income. 
D) in Keynes's theory, money demand is a function of the real interest rate, rather than the nominal interest rate. 
A) there is no role for the opportunity cost of holding money in Friedman's theory. 
B) in Keynes's theory, changes in output have no effect on the demand for money. 
C) in Friedman's theory, money demand responds only slightly to short-run fluctuations in income. 
D) in Keynes's theory, money demand is a function of the real interest rate, rather than the nominal interest rate.

Question 9

The volume of transactions is

Accepted Answer

A) greater than GDP, because GDP does not include purchases of assets. 
B) greater than GDP, because GDP does not include spending by the government. 
C) smaller than GDP, because GDP includes purchases of assets which are not included in the volume of transactions. 
D) smaller than GDP, because data on the volume of transactions are published monthly, whereas data on GDP are published annually. 
A) greater than GDP, because GDP does not include purchases of assets. 
B) greater than GDP, because GDP does not include spending by the government. 
C) smaller than GDP, because GDP includes purchases of assets which are not included in the volume of transactions. 
D) smaller than GDP, because data on the volume of transactions are published monthly, whereas data on GDP are published annually.

Question 10

In the Baumol-Tobin view, a decrease 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 11

If on average a dollar is spent five times each year to purchase goods and services in the economy, then

Accepted Answer

A) the value of velocity must be 0.2. 
B) the value of velocity must be 5. 
C) the value of nominal GDP divided by the money supply must be 0.2. 
D) the value of the money supply divided by nominal GDP must be 5. 
A) the value of velocity must be 0.2. 
B) the value of velocity must be 5. 
C) the value of nominal GDP divided by the money supply must be 0.2. 
D) the value of the money supply divided by nominal GDP must be 5.

Question 12

If people use automated teller machines more frequently, what will happen to M1 velocity?

Accepted Answer

A) It will rise. 
B) It will fall. 
C) It will be unaffected. 
D) It will rise, fall, or be unaffected depending upon the size of the money multiplier. 
A) It will rise. 
B) It will fall. 
C) It will be unaffected. 
D) It will rise, fall, or be unaffected depending upon the size of the money multiplier.

Question 13

The velocity of money represents

Accepted Answer

A) the total number of times a dollar is spent on a purchase of final goods and services. 
B) the average number of times a dollar is spent on a purchase of final goods and services. 
C) the speed with which one country's currency may be converted into another country's currency. 
D) how quickly paper currency wears out and must be replaced. 
A) the total number of times a dollar is spent on a purchase of final goods and services. 
B) the average number of times a dollar is spent on a purchase of final goods and services. 
C) the speed with which one country's currency may be converted into another country's currency. 
D) how quickly paper currency wears out and must be replaced.

Question 14

In the period since 1914,

Accepted Answer

A) M1 velocity has been roughly constant. 
B) M2 velocity has been roughly constant. 
C) neither M1 nor M2 velocity has been constant. 
D) both M1 and M2 velocity have been roughly constant. 
A) M1 velocity has been roughly constant. 
B) M2 velocity has been roughly constant. 
C) neither M1 nor M2 velocity has been constant. 
D) both M1 and M2 velocity have been roughly constant.

Question 15

The demand for money for transactions is

Accepted Answer

A) independent of the price level. 
B) likely to fall during periods of inflation. 
C) proportional to the price level. 
D) constant over long periods of time. 
A) independent of the price level. 
B) likely to fall during periods of inflation. 
C) proportional to the price level. 
D) constant over long periods of time.

Question 16

Keynes called the willingess of individuals to hold money to pay for unexpected transactions,

Accepted Answer

A) the transactions motive. 
B) the impulse motive. 
C) the speculative motive. 
D) the precautionary motive. 
A) the transactions motive. 
B) the impulse motive. 
C) the speculative motive. 
D) the precautionary motive.

Question 17

An increase in expected inflation leads to a decline in money demand if

Accepted Answer

A) interest payments are taxed at the same rate as wage income. 
B) nominal output increases as least as much as the price level. 
C) market interest rates fall. 
D) market interest rates rise more than the interest paid on money balances. 
A) interest payments are taxed at the same rate as wage income. 
B) nominal output increases as least as much as the price level. 
C) market interest rates fall. 
D) market interest rates rise more than the interest paid on money balances.

Question 18

Which of the following is a key assumption of Irving Fisher's quantity theory of money demand?

Accepted Answer

A) Increases in the price level reduce the level of real money balances. 
B) The price level is always constant. 
C) The money supply is always constant. 
D) Velocity is always constant. 
A) Increases in the price level reduce the level of real money balances. 
B) The price level is always constant. 
C) The money supply is always constant. 
D) Velocity is always constant.

Question 19

Keynes assumed that the return on money was

Accepted Answer

A) zero. 
B) the same as the return on bonds. 
C) the same as the return on bonds, adjusted for capital gains. 
D) the nominal interest rate minus the expected inflation rate. 
A) zero. 
B) the same as the return on bonds. 
C) the same as the return on bonds, adjusted for capital gains. 
D) the nominal interest rate minus the expected inflation rate.

Question 20

The expression for velocity derived from Keynes's liquidity preference theory is

Accepted Answer

A) V = P/L(Y, i). 
B) V = L(Y, i)/P. 
C) V = Y/L(Y, i). 
D) V = L(Y, i)/Y. 
A) V = P/L(Y, i). 
B) V = L(Y, i)/P. 
C) V = Y/L(Y, i). 
D) V = L(Y, i)/Y.

Exam 23: The Demand for Money

Milton Friedman first proposed his explanation of money demand in

Why do most standard academic models used by economists ignore money?

Which of the following statements is true concerning the velocity of M1?

Weighted monetary aggregates differ from traditional monetary aggregates in that they

Since 1965, the price level in the United States has

The quantity theory of money

If nothing else changes, a higher price level

An important difference between Keynes's approach to the demand for money and Friedman's approach is that

The volume of transactions is

In the Baumol-Tobin view, a decrease in interest rates will cause individuals to hold

If on average a dollar is spent five times each year to purchase goods and services in the economy, then

If people use automated teller machines more frequently, what will happen to M1 velocity?

The velocity of money represents

In the period since 1914,

The demand for money for transactions is

Keynes called the willingess of individuals to hold money to pay for unexpected transactions,

An increase in expected inflation leads to a decline in money demand if

Which of the following is a key assumption of Irving Fisher's quantity theory of money demand?

Keynes assumed that the return on money was

The expression for velocity derived from Keynes's liquidity preference theory is

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