Question 1

Until the early 1970s evidence strongly supported ________.

Accepted Answer

A)  stability of the money demand function 
B)  variability of money demand 
C)  increasing financial innovation 
D)  the importance of fiscal policy 
A)  stability of the money demand function 
B)  variability of money demand 
C)  increasing financial innovation 
D)  the importance of fiscal policy A

Question 2

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

Accepted Answer

A budget deficient can lead to an increase in the money supply if it is financed by the creation of high-powered money.Because the quantity theory of money explains inflation only in the long run,to produce inflation,the budget deficit must be persistent.

Question 3

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 ________.

Accepted Answer

A)  reduces real GDP to $2.5 trillion 
B)  causes velocity to rise to 10 
C)  decreases the price level to 1 
D)  decreases the price level to 1 and decreases velocity to 2.5 
A)  reduces real GDP to $2.5 trillion 
B)  causes velocity to rise to 10 
C)  decreases the price level to 1 
D)  decreases the price level to 1 and decreases velocity to 2.5 C

Question 4

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

Accepted Answer

A)  reducing risk 
B)  reducing income 
C)  avoiding taxes 
D)  reducing transactions cost 
A)  reducing risk 
B)  reducing income 
C)  avoiding taxes 
D)  reducing transactions cost

Question 5

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 ________.

Accepted Answer

A)  increase; increase 
B)  increase; decrease 
C)  decrease; decrease 
D)  decrease; increase 
A)  increase; increase 
B)  increase; decrease 
C)  decrease; decrease 
D)  decrease; increase

Question 6

Cutting the money supply by one-third is predicted by the quantity theory of money to cause ________.

Accepted Answer

A)  a sharp decline in real output of one-third in the short run, and a fall in the price level by one-third in the long run 
B)  a decline in real output by one-third 
C)  a decline in output by one-sixth, and a decline in the price level of one-sixth 
D)  a decline in the price level by one-third 
A)  a sharp decline in real output of one-third in the short run, and a fall in the price level by one-third in the long run 
B)  a decline in real output by one-third 
C)  a decline in output by one-sixth, and a decline in the price level of one-sixth 
D)  a decline in the price level by one-third

Question 7

Empirically testing the long-term quantity of money for Canada shows ________.

Accepted Answer

A)  a strong positive relationship between inflation and money growth rates 
B)  a weak positive relationship between inflation and money growth rates 
C)  a weak negative relationship between inflation and money growth rates 
D)  a strong negative relationship between inflation and money growth rates 
A)  a strong positive relationship between inflation and money growth rates 
B)  a weak positive relationship between inflation and money growth rates 
C)  a weak negative relationship between inflation and money growth rates 
D)  a strong negative relationship between inflation and money growth rates

Question 8

The effect of money on the economy is called ________.

Accepted Answer

A)  monetary supply 
B)  monetary policy 
C)  fiscal policy 
D)  monetary demand 
A)  monetary supply 
B)  monetary policy 
C)  fiscal policy 
D)  monetary demand

Question 9

Of the three motives for holding money suggested by Keynes,which did he believe to be the most sensitive to interest rates?

Accepted Answer

A)  The transactions motive 
B)  The precautionary motive 
C)  The speculative motive 
D)  The altruistic motive 
A)  The transactions motive 
B)  The precautionary motive 
C)  The speculative motive 
D)  The altruistic motive

Question 10

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

Accepted Answer

A)  a constant velocity 
B)  irrational behavior on the part of some economic agents 
C)  interest rates on the demand for money 
D)  expectations 
A)  a constant velocity 
B)  irrational behavior on the part of some economic agents 
C)  interest rates on the demand for money 
D)  expectations

Question 11

A plot of Canadian inflation against annual money growth rate between 1971 and 2011 shows ________.

Accepted Answer

A)  money supply lags by two years 
B)  money supply lags by one year 
C)  that the two are contemporaneously correlated 
D)  are uncorrelated 
A)  money supply lags by two years 
B)  money supply lags by one year 
C)  that the two are contemporaneously correlated 
D)  are uncorrelated

Question 12

Tobin's model of the speculative demand for money improves on Keynes's analysis by showing that ________.

Accepted Answer

A)  the speculative demand for money is interest insensitive 
B)  the transactions demand for money is interest insensitive 
C)  people will hold a diversified portfolio 
D)  people will hold money or bonds but not both 
A)  the speculative demand for money is interest insensitive 
B)  the transactions demand for money is interest insensitive 
C)  people will hold a diversified portfolio 
D)  people will hold money or bonds but not both

Question 13

Starting in 1974,the conventional M1 money demand function began to severely ________ the demand for money.Stephen Goldfeld labeled this phenomenon "the case of the missing ________."

Accepted Answer

A)  underpredict; velocity 
B)  overpredict; velocity 
C)  underpredict; money 
D)  overpredict; money 
A)  underpredict; velocity 
B)  overpredict; velocity 
C)  underpredict; money 
D)  overpredict; money

Question 14

Conventional money demand functions tended to ________ money demand in the middle and late 1970s,and ________ velocity beginning in 1982.

Accepted Answer

A)  overpredict; overpredict 
B)  overpredict; underpredict 
C)  underpredict; overpredict 
D)  underpredict; underpredict 
A)  overpredict; overpredict 
B)  overpredict; underpredict 
C)  underpredict; overpredict 
D)  underpredict; underpredict

Question 15

The Keynesian demand for real balances can be expressed as ________.

Accepted Answer

A)  Md = f(i,Y) 
B)  Md/P = f(i) 
C)  Md/P = f(Y) 
D)  Md/P = f(i,Y) 
A)  Md = f(i,Y) 
B)  Md/P = f(i) 
C)  Md/P = f(Y) 
D)  Md/P = f(i,Y)

Question 16

In March 2007,the inflation rate in Zimbabwe reached ________.

Accepted Answer

A)  over 1500 percent 
B)  over 150 percent 
C)  over 15 percent 
D)  over 15000 percent 
A)  over 1500 percent 
B)  over 150 percent 
C)  over 15 percent 
D)  over 15000 percent

Question 17

Starting in 1974,the conventional M1 money demand function began to ________.

Accepted Answer

A)  severely underpredict the demand for money 
B)  severely overpredict the demand for money 
C)  predict more precisely the demand for money 
D)  do none of the above 
A)  severely underpredict the demand for money 
B)  severely overpredict the demand for money 
C)  predict more precisely the demand for money 
D)  do none of the above

Question 18

The velocity of money is defined as ________.

Accepted Answer

A)  real GDP divided by the money supply 
B)  nominal GDP divided by the money supply 
C)  real GDP times the money supply 
D)  nominal GDP times the money supply 
A)  real GDP divided by the money supply 
B)  nominal GDP divided by the money supply 
C)  real GDP times the money supply 
D)  nominal GDP times the money supply

Question 19

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

Accepted Answer

A)  classical 
B)  Cambridge 
C)  liquidity preference 
D)  Pigouvian 
A)  classical 
B)  Cambridge 
C)  liquidity preference 
D)  Pigouvian

Question 20

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

Accepted Answer

A)  interest rates 
B)  velocity 
C)  income 
D)  stock market prices 
A)  interest rates 
B)  velocity 
C)  income 
D)  stock market prices

Exam 21: Quantity Theory, inflation, and the Demand for Money

Until the early 1970s evidence strongly supported ________.

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

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 ________.

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

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 ________.

Cutting the money supply by one-third is predicted by the quantity theory of money to cause ________.

Empirically testing the long-term quantity of money for Canada shows ________.

The effect of money on the economy is called ________.

Of the three motives for holding money suggested by Keynes,which did he believe to be the most sensitive to interest rates?

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

A plot of Canadian inflation against annual money growth rate between 1971 and 2011 shows ________.

Tobin's model of the speculative demand for money improves on Keynes's analysis by showing that ________.

Starting in 1974,the conventional M1 money demand function began to severely ________ the demand for money.Stephen Goldfeld labeled this phenomenon "the case of the missing ________."

Conventional money demand functions tended to ________ money demand in the middle and late 1970s,and ________ velocity beginning in 1982.

The Keynesian demand for real balances can be expressed as ________.

In March 2007,the inflation rate in Zimbabwe reached ________.

Starting in 1974,the conventional M1 money demand function began to ________.

The velocity of money is defined as ________.

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

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

Why Study Money, banking, and Financial Markets

An Overview of the Financial System

What Is Money

Understanding Interest Rates

The Behaviour of Interest Rates

The Risk and Term Structure of Interest Rates

The Stock Market, the Theory of Rational Expectations, and the Efficient Market Hypothesis

An Economic Analysis of Financial Structure

Financial Crises

Economic Analysis of Financial Regulation

Banking Industry: Structure and Competition

Nonbank Finance

Banking and the Management of Financial Institutions

Risk Management With Financial Derivatives

Central Banks and the Bank of Canada

The Money Supply Process

Tools of Monetary Policy

The Conduct of Monetary Policy: Strategy and Tactics

The Foreign Exchange Market

The International Financial System

The Is Curve

The Monetary Policy and Aggregate Demand Curves

Aggregate Demand and Supply Analysis

Monetary Policy Theory

The Role of Expectations in Monetary Policy

Transmission Mechanisms of Monetary Policy

The ISLM Model

Filters

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 .

Starting in 1974,the conventional M1 money demand function began to severely the demand for money.Stephen Goldfeld labeled this phenomenon "the case of the missing ."

Conventional money demand functions tended to money demand in the middle and late 1970s,and velocity beginning in 1982.