Exam 20: Quantity Theory, Inflation, and the Demand for Money

Until the early 1970s evidence strongly supported ________.

The classical economists believed that if the quantity of money doubled, ________.

In Irving Fisher's quantity theory of money, velocity was determined by ________.

If initially the money supply is $2 trillion, velocity is 5, the price level is 2, and real GDP is $5 trillion, a fall in the money supply to $1 trillion ________.

Keynes's model of the demand for money suggests that velocity is ________.

In the Baumol-Tobin analysis of transactions demand, scale economies imply that an increase in real income increases the quantity of money demanded ________, while an increase in the price level increases the quantity of money demanded ________.

Tobin's model of the speculative demand for money shows that people hold money as a ________ as a way of reducing ________.

The Keynesian theory of money demand emphasizes the importance of ________.

________ quantity theory of money suggests that the demand for money is purely a function of income, and interest rates have no effect on the demand for money.

Because interest rates have substantial fluctuations, the ________ theory of the demand for money indicates that velocity has substantial fluctuations as well.

In the equation of exchange, the concept that provides the link between M and PY is called ________.

Keynes hypothesized that the precautionary component of money demand was primarily determined by the level of ________.

Give the equation of exchange and explain the variables used in it. Why we call it an identity?

Velocity is defined as ________.

The evidence on the interest sensitivity of the demand for money suggests that the demand for money is ________ to interest rates, and there is ________ evidence that a liquidity trap exists.

Keynes argued that when interest rates were high relative to some normal value, people would expect bond prices to ________ , so the quantity of money demanded would ________.

Because Keynes assumed that the expected return on money was zero, he argued that people would ________.

Explain the Keynesian theory of money demand. What motives did Keynes think determined money demand? What are the two reasons why Keynes thought velocity could not be treated as a constant?

According to the quantity theory of money demand, ________.

Explain how financing a persistent deficit by money creation will lead to a sustained inflation.