Question 1

People have a portfolio demand for money in part because:

Accepted Answer

A) money is part of a well-diversified financial portfolio. 
B) the return on money is often higher than other financial assets. 
C) money is needed to pay brokerage commissions. 
D) there is no cost to holding money which gives it a relatively high return. 
A) money is part of a well-diversified financial portfolio. 
B) the return on money is often higher than other financial assets. 
C) money is needed to pay brokerage commissions. 
D) there is no cost to holding money which gives it a relatively high return. A

Question 2

A decline in the yields earned by bonds should:

Accepted Answer

A) not impact the demand for money since money doesn't earn any interest. 
B) also decrease the demand for money. 
C) increase the demand for money. 
D) increase the velocity of money. 
A) not impact the demand for money since money doesn't earn any interest. 
B) also decrease the demand for money. 
C) increase the demand for money. 
D) increase the velocity of money. C

Question 3

How does money velocity contribute to the observation that in countries with high rates of inflation the inflation rate exceeds the rate of money growth?

Accepted Answer

Inflation contributes to high velocity in the sense that inflation increases the opportunity cost of holding money.When inflation is extremely high, say 1000 percent, the opportunity cost of holding money is equivalent to the rate of inflation, or in this case -1000%.At this high of a rate money loses value quickly so people will want to exchange it for durable goods (which do not lose value with inflation) as quickly as possible.This will cause the velocity of money to rise rapidly.The quantity theory of money reveals that given a real income, the percentage change in the price level (inflation) will equal the percentage change in money growth plus the percentage change in velocity.So the rate of inflation exceeds the growth rate of money.

Question 4

Why do people hold money? Explain the reasons.

Accepted Answer

First, people hold money in order to pay

Question 5

Which of the following statements is most correct?

Accepted Answer

A) The current rate of inflation is the result of money growth. 
B) Money growth is the result of inflation. 
C) There is no clear link between high, sustained inflation and the monetary aggregates. 
D) It is impossible to have high, sustained inflation without monetary accommodation. 
A) The current rate of inflation is the result of money growth. 
B) Money growth is the result of inflation. 
C) There is no clear link between high, sustained inflation and the monetary aggregates. 
D) It is impossible to have high, sustained inflation without monetary accommodation.

Question 6

Using the equation of exchange, if inflation is 1.5%, real output grows by 3.0%, and the growth rate of money is 5.0%, the change in the velocity of money is:

Accepted Answer

A) Zero; velocity is constant. 
B) -0.5%. 
C) +4.5%. 
D) +0.5%. 
A) Zero; velocity is constant. 
B) -0.5%. 
C) +4.5%. 
D) +0.5%.

Question 7

During economic slowdowns (recessions) the velocity of money tends to:

Accepted Answer

A) remain relatively stable. 
B) increase slightly. 
C) increase dramatically. 
D) decrease. 
A) remain relatively stable. 
B) increase slightly. 
C) increase dramatically. 
D) decrease.

Question 8

As a person's wealth increases we would expect the demand for money to:

Accepted Answer

A) decrease. 
B) increase dollar for dollar with wealth. 
C) increase but at a rate less than dollar for dollar. 
D) not change; money demand does not vary with wealth, only with income. 
A) decrease. 
B) increase dollar for dollar with wealth. 
C) increase but at a rate less than dollar for dollar. 
D) not change; money demand does not vary with wealth, only with income.

Question 9

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 10

Assuming a constant nominal GDP, would the velocity of M1 equal the velocity of M2? Explain.

Accepted Answer

No, the velocity of M1 would be greater

Question 11

The equation for money demand expressed in the chapter that is derived from the equation of exchange is:

Accepted Answer

We see that the equation does not explic

Question 12

Key assumptions behind the quantity theory of money include:

Accepted Answer

A) the money supply is fixed. 
B) the velocity of money is constant. 
C) the percentage change in the price level equals the percentage change in real GDP. 
D) the change in nominal GDP is zero. 
A) the money supply is fixed. 
B) the velocity of money is constant. 
C) the percentage change in the price level equals the percentage change in real GDP. 
D) the change in nominal GDP is zero.

Question 13

The velocity of money increases if:

Accepted Answer

A) each unit of money is used more frequently. 
B) each unit of money is used less frequently. 
C) more purchases are made. 
D) none of the above answers is correct; the velocity of money is constant. 
A) each unit of money is used more frequently. 
B) each unit of money is used less frequently. 
C) more purchases are made. 
D) none of the above answers is correct; the velocity of money is constant.

Question 14

If real GDP stays the same but the price level increases:

Accepted Answer

A) nominal money demand should remain the same. 
B) nominal money demand should decrease. 
C) nominal money demand should increase. 
D) real money demand should decrease. 
A) nominal money demand should remain the same. 
B) nominal money demand should decrease. 
C) nominal money demand should increase. 
D) real money demand should decrease.

Question 15

Crises that occasionally hit financial markets will increase the demand for money since:

Accepted Answer

A) the return on money increases. 
B) the return on financial assets increases. 
C) there is no risk with holding money. 
D) the risk of holding money relative to other financial assets decreases. 
A) the return on money increases. 
B) the return on financial assets increases. 
C) there is no risk with holding money. 
D) the risk of holding money relative to other financial assets decreases.

Question 16

The empirical data reveals the velocity of M2 to be:

Accepted Answer

A) relatively stable in the long run. 
B) highly volatile in the long run. 
C) stable only when measured annually. 
D) higher than the velocity of M1. 
A) relatively stable in the long run. 
B) highly volatile in the long run. 
C) stable only when measured annually. 
D) higher than the velocity of M1.

Question 17

If we look at the equation for money demand from Irving Fisher, which of the following statements is true?

Accepted Answer

A) Velocity does not play any role in the equation 
B) Money demand is not a factor of nominal income 
C) The price level does not impact money demand 
D) There isn't an explicit role for the interest rate in the equation 
A) Velocity does not play any role in the equation 
B) Money demand is not a factor of nominal income 
C) The price level does not impact money demand 
D) There isn't an explicit role for the interest rate in the equation

Question 18

The Lucas critique focuses specifically on:

Accepted Answer

A) the relationship between Fed policy and the money supply. 
B) the role that economic policymaking has on people's economic behavior. 
C) the inability to measure economic performance accurately. 
D) the moving away from fixed exchange rates to flexible exchange rates. 
A) the relationship between Fed policy and the money supply. 
B) the role that economic policymaking has on people's economic behavior. 
C) the inability to measure economic performance accurately. 
D) the moving away from fixed exchange rates to flexible exchange rates.

Question 19

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 20

If the Fed wanted to keep inflation in check given the growth rate of the economy, how should they have responded to the financial innovations of the mid to late 1970s and early 1980s in terms of money growth?

Accepted Answer

The financial innovations of the late 19

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

People have a portfolio demand for money in part because:

A decline in the yields earned by bonds should:

How does money velocity contribute to the observation that in countries with high rates of inflation the inflation rate exceeds the rate of money growth?

Why do people hold money? Explain the reasons.

Which of the following statements is most correct?

Using the equation of exchange, if inflation is 1.5%, real output grows by 3.0%, and the growth rate of money is 5.0%, the change in the velocity of money is:

During economic slowdowns (recessions) the velocity of money tends to:

As a person's wealth increases we would expect the demand for money to:

Assuming a constant nominal GDP, would the velocity of M1 equal the velocity of M2? Explain.

The equation for money demand expressed in the chapter that is derived from the equation of exchange is:

Key assumptions behind the quantity theory of money include:

The velocity of money increases if:

If real GDP stays the same but the price level increases:

Crises that occasionally hit financial markets will increase the demand for money since:

The empirical data reveals the velocity of M2 to be:

If we look at the equation for money demand from Irving Fisher, which of the following statements is true?

The Lucas critique focuses specifically on:

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

If the Fed wanted to keep inflation in check given the growth rate of the economy, how should they have responded to the financial innovations of the mid to late 1970s and early 1980s in terms of money growth?

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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