Question 1

The opportunity cost of holding money is:

Accepted Answer

A)  the nominal interest rate. 
B)  the real interest rate. 
C)  the nominal interest rate less the cost of converting a bond to cash. 
D)  the rate of inflation. 
A)  the nominal interest rate. 
B)  the real interest rate. 
C)  the nominal interest rate less the cost of converting a bond to cash. 
D)  the rate of inflation.

Question 2

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.

Accepted Answer

First, we should see a positive elastici

Question 3

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.

Accepted Answer

Likely not. In the 1990s and 2000s the s

Question 4

The equation for money demand expressed in the chapter that is derived from the equation of exchange is:
$ M^{d}=\frac{1}{V} P Y $ 
We see that the equation does not explicitly address the interest rate. In fact, Professor Fisher assumed that velocity is constant which means 1/V is also a constant. Why do you think Professor Fisher left the interest rate out of the equation? Do you think he would if he were alive today? Explain.

Accepted Answer

Professor Fisher made two assumptions, o

Question 5

If monetary policymakers cannot accurately forecast shifts in money demand, what are they really only left with for a short-term policy instrument and why?

Accepted Answer

If monetary policymakers cannot accurate

Question 6

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

Accepted Answer

No. The velocity of money can be volatil

Question 7

In the late 1970s and early 1980s, the velocity of money increased significantly. The main reason(s) for the increase was:

Accepted Answer

A)  as presidential election years near the velocity of money increases. 
B)  the introduction of stock and bond mutual funds with draft writing privileges and low nominal interest rates. 
C)  high nominal interest rates. 
D)  the introduction of stock and bond mutual funds with draft writing privileges along with high nominal interest rates. 
A)  as presidential election years near the velocity of money increases. 
B)  the introduction of stock and bond mutual funds with draft writing privileges and low nominal interest rates. 
C)  high nominal interest rates. 
D)  the introduction of stock and bond mutual funds with draft writing privileges along with high nominal interest rates.

Question 8

If we look at the value of money in terms of how many units of a good it takes to buy one dollar, then inflation means:

Accepted Answer

A)  it would take more goods to buy the same dollar. 
B)  it would take fewer goods to buy the same dollar. 
C)  the same number of goods would buy fewer dollars. 
D)  it would take fewer dollars to buy the same goods. 
A)  it would take more goods to buy the same dollar. 
B)  it would take fewer goods to buy the same dollar. 
C)  the same number of goods would buy fewer dollars. 
D)  it would take fewer dollars to buy the same goods.

Question 9

Which of the following statements is true?

Accepted Answer

A)  While the Fed emphasizes money growth more than the ECB, both central banks have chosen interest rates as their operating target. 
B)  While the Fed emphasizes money growth less than the ECB, both central banks have chosen interest rates as their operating target. 
C)  Because the Fed emphasizes money growth less than the ECB, the Fed uses interest rates as their operating target while the ECB looks at growth in money aggregates. 
D)  Both the Fed and the ECB use growth in money aggregates as their operating target. 
A)  While the Fed emphasizes money growth more than the ECB, both central banks have chosen interest rates as their operating target. 
B)  While the Fed emphasizes money growth less than the ECB, both central banks have chosen interest rates as their operating target. 
C)  Because the Fed emphasizes money growth less than the ECB, the Fed uses interest rates as their operating target while the ECB looks at growth in money aggregates. 
D)  Both the Fed and the ECB use growth in money aggregates as their operating target.

Question 10

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

Accepted Answer

In countries where inflation and money g

Question 11

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

Accepted Answer

Economists maintain that the CPI, which

Question 12

For the Fed to use money growth as a direct monetary policy target, which of the following needs to exist?

Accepted Answer

A)  A highly variable deposit expansion multiplier 
B)  A stable link between the monetary base and the quantity of money 
C)  A predictable link between the quantity of money and the deposit expansion multiplier 
D)  A stable link between the monetary base and the quantity of money and a predictable relationship between the quantity of money and the rate of inflation 
A)  A highly variable deposit expansion multiplier 
B)  A stable link between the monetary base and the quantity of money 
C)  A predictable link between the quantity of money and the deposit expansion multiplier 
D)  A stable link between the monetary base and the quantity of money and a predictable relationship between the quantity of money and the rate of inflation

Question 13

Milton Friedman's assertion that "inflation is a monetary phenomenon" is based on:

Accepted Answer

A)  the quantity theory of money. 
B)  the assumption of constant nominal GDP growth. 
C)  the assumption that the price level grows at the same rate as real GDP. 
D)  the assumption that the central bank increases the money supply by a constant rate every year. 
A)  the quantity theory of money. 
B)  the assumption of constant nominal GDP growth. 
C)  the assumption that the price level grows at the same rate as real GDP. 
D)  the assumption that the central bank increases the money supply by a constant rate every year.

Question 14

Why did a decline in mortgage rates in the 1990s cause the velocity of M2 to fluctuate?

Accepted Answer

When mortgage rates fall (as they did in

Question 15

Based on the analysis of the equation of exchange, Irving Fisher, derived the quantity theory of money which states that:

Accepted Answer

A)  velocity changes always offset changes in the supply of money. 
B)  changes in the aggregate price level are caused solely by changes in velocity. 
C)  changes in the aggregate price level are caused solely by changes in the quantity of money. 
D)  none of the answers given is correct. 
A)  velocity changes always offset changes in the supply of money. 
B)  changes in the aggregate price level are caused solely by changes in velocity. 
C)  changes in the aggregate price level are caused solely by changes in the quantity of money. 
D)  none of the answers given is correct.

Question 16

Why do people hold money? Explain the reasons.

Accepted Answer

First, people hold money in order to pay

Question 17

The velocity of money equals:

Accepted Answer

A)  nominal GDP times the price level. 
B)  nominal GDP times the money supply. 
C)  nominal GDP divided by the price level. 
D)  nominal GDP divided by the money supply. 
A)  nominal GDP times the price level. 
B)  nominal GDP times the money supply. 
C)  nominal GDP divided by the price level. 
D)  nominal GDP divided by the money supply.

Question 18

Which of the following statements best completes the sentence, "All other factors constant, as the nominal interest rate increases, the opportunity cost of money..."?

Accepted Answer

A)  decreases, the velocity of money decreases, and the quantity of money people want to hold decreases. 
B)  increases, the velocity of money decreases, and the quantity of money people want to hold decreases. 
C)  decreases, the velocity of money increases, and the quantity of money people want to hold decreases. 
D)  increases, the velocity of money increases, and the quantity of money people want to hold decreases. 
A)  decreases, the velocity of money decreases, and the quantity of money people want to hold decreases. 
B)  increases, the velocity of money decreases, and the quantity of money people want to hold decreases. 
C)  decreases, the velocity of money increases, and the quantity of money people want to hold decreases. 
D)  increases, the velocity of money increases, and the quantity of money people want to hold decreases.

Question 19

In the late 1970s into the early 1980s, interest rates were high and very volatile. During this period:

Accepted Answer

A)  the velocity of money should have been stable. 
B)  money demand as well as velocity should have also been shifting and volatile. 
C)  it should have been easy for the Fed to predict the velocity of money. 
D)  the Fed was actually targeting the short-term interest rate. 
A)  the velocity of money should have been stable. 
B)  money demand as well as velocity should have also been shifting and volatile. 
C)  it should have been easy for the Fed to predict the velocity of money. 
D)  the Fed was actually targeting the short-term interest rate.

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?

Accepted Answer

It is the velocity of money. I

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

The opportunity cost of holding money is:

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.

If monetary policymakers cannot accurately forecast shifts in money demand, what are they really only left with for a short-term policy instrument and why?

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

In the late 1970s and early 1980s, the velocity of money increased significantly. The main reason(s) for the increase was:

If we look at the value of money in terms of how many units of a good it takes to buy one dollar, then inflation means:

Which of the following statements is true?

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

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

For the Fed to use money growth as a direct monetary policy target, which of the following needs to exist?

Milton Friedman's assertion that "inflation is a monetary phenomenon" is based on:

Why did a decline in mortgage rates in the 1990s cause the velocity of M2 to fluctuate?

Based on the analysis of the equation of exchange, Irving Fisher, derived the quantity theory of money which states that:

Why do people hold money? Explain the reasons.

The velocity of money equals:

Which of the following statements best completes the sentence, "All other factors constant, as the nominal interest rate increases, the opportunity cost of money..."?

In the late 1970s into the early 1980s, interest rates were high and very volatile. During this period:

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?

An Introduction to Money and the Financial System

Money and the Payments System

Financial Instruments, Financial Markets, and Financial Institutions

Future Value, Present Value and Interest Rates

Understanding Risk

Bonds, Bond Prices, and the Determination of Interest Rates

The Risk and Term Structure of Interest Rates

Stocks, Stock Markets and Market Efficiency

Derivatives: Futures, Options, and Swaps

Foreign Exchange

The Economics of Financial Intermediation

Depository Institutions: Banks and Bank Management

Financial Industry Structure

Regulating the Financial System

Central Banks in the World Today

The Structure of Central Banks: The Federal Reserve and the European Central Bank

The Central Bank Balance Sheet and the Money Supply Process

Monetary Policy: Stabilizing the Domestic Economy

Exchange Rate Policy and the Central Bank

Output, Inflation, and Monetary Policy

Understanding Business Cycle Fluctuations

Modern Monetary Policy and the Challenges Facing Central Bankers

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