Question 1

Which of the following would reflect the transactions demand for money?

Accepted Answer

A) Keeping funds in your checking account to pay your rent 
B) Keeping funds in your savings account because the interest rate looks relatively attractive 
C) Selling common stocks you own and increasing the money in your savings account because you think stock prices will fall soon 
D) Buying a U.S.Treasury security using funds from your checking account 
A) Keeping funds in your checking account to pay your rent 
B) Keeping funds in your savings account because the interest rate looks relatively attractive 
C) Selling common stocks you own and increasing the money in your savings account because you think stock prices will fall soon 
D) Buying a U.S.Treasury security using funds from your checking account

Question 2

Nobel-laureate economist Milton Friedman suggested that policymakers strive to ensure that the monetary aggregates:

Accepted Answer

A) grow at a rate equal to the rate of inflation. 
B) grow at a rate equal to the rate of real growth plus the desired level of inflation. 
C) grow at a rate equal to the rate of real growth less the desired level of inflation. 
D) remain constant in terms of dollar amounts. 
A) grow at a rate equal to the rate of inflation. 
B) grow at a rate equal to the rate of real growth plus the desired level of inflation. 
C) grow at a rate equal to the rate of real growth less the desired level of inflation. 
D) remain constant in terms of dollar amounts.

Question 3

Equilibrium in the money market would be expressed by which of the following?

Accepted Answer

A) Ms = (1/V)Y 
B) Ms = Md 
C) Ms = (1/V)P 
D) Md = (1/V)P 
A) Ms = (1/V)Y 
B) Ms = Md 
C) Ms = (1/V)P 
D) Md = (1/V)P

Question 4

If money growth and real output growth are both zero, the change in the price level will:

Accepted Answer

A) also be zero. 
B) equal the percentage change in velocity. 
C) be indeterminate. 
D) be the inverse of the percentage change in velocity. 
A) also be zero. 
B) equal the percentage change in velocity. 
C) be indeterminate. 
D) be the inverse of the percentage change in velocity.

Question 5

A major contributing factor to the instability of money demand over the past 25 years is the:

Accepted Answer

A) introduction of financial instruments that pay higher returns than money but can be used as a means of payment. 
B) Fed has changed the way the money aggregates are defined. 
C) failure of many savings and loans. 
D) introduction of credit cards. 
A) introduction of financial instruments that pay higher returns than money but can be used as a means of payment. 
B) Fed has changed the way the money aggregates are defined. 
C) failure of many savings and loans. 
D) introduction of credit cards.

Question 6

Using the equation of exchange, if real GDP increases by 3.0%, the velocity of money grows by 1.0% and the growth rate of money is 3.0%; what is the rate of inflation?

Accepted Answer

A) +1.0% 
B) It is constant or a 0% change 
C) It is the same as the growth rate of money, or 3.0% 
D) -1.0% 
A) +1.0% 
B) It is constant or a 0% change 
C) It is the same as the growth rate of money, or 3.0% 
D) -1.0%

Question 7

When nominal interest rates are high, the velocity of money should:

Accepted Answer

A) be low. 
B) also be high. 
C) not change; the velocity of money does not vary with the interest rate. 
D) decrease by the same percent that the nominal interest rate has increased. 
A) be low. 
B) also be high. 
C) not change; the velocity of money does not vary with the interest rate. 
D) decrease by the same percent that the nominal interest rate has increased.

Question 8

Statistical analysis reveals that the long-run money velocity (for euro-area M3, which is equivalent to U.S.M2):

Accepted Answer

A) is unstable in the euro similar to the instability that exists in the U.S. 
B) is much more stable in the U.S.than in the euro area. 
C) has increased in the euro area since 1980. 
D) is more stable in the euro area than in the U.S. 
A) is unstable in the euro similar to the instability that exists in the U.S. 
B) is much more stable in the U.S.than in the euro area. 
C) has increased in the euro area since 1980. 
D) is more stable in the euro area than in the U.S.

Question 9

Given that the velocity of money can be unstable in the short run, is this reason enough to dismiss money growth as a policy target? Explain.

Accepted Answer

Not necessarily.Intermediate targets can

Question 10

Using the equation of exchange, if inflation is 1%, the velocity of money grows by 1.0% and the growth rate of money is 3.0%; what is real growth?

Accepted Answer

A) +3.0% 
B) 1% 
C) 4.0% 
D) -1.0% 
A) +3.0% 
B) 1% 
C) 4.0% 
D) -1.0%

Question 11

Which of the following statements is most correct?

Accepted Answer

A) The velocity of M2 is relatively stable across all time periods. 
B) The velocity of M2 is less stable than the velocity of M1. 
C) The velocity of M2 is more volatile in the short run than the long run. 
D) Fisher's assumption about money velocity being stable in the long run was incorrect. 
A) The velocity of M2 is relatively stable across all time periods. 
B) The velocity of M2 is less stable than the velocity of M1. 
C) The velocity of M2 is more volatile in the short run than the long run. 
D) Fisher's assumption about money velocity being stable in the long run was incorrect.

Question 12

Money held for precautionary reasons is included in the demand for money:

Accepted Answer

A) as a third, separate category called the precautionary demand for money. 
B) as part of transactions demand. 
C) as part of portfolio demand. 
D) partly as transactions demand and partly as portfolio demand. 
A) as a third, separate category called the precautionary demand for money. 
B) as part of transactions demand. 
C) as part of portfolio demand. 
D) partly as transactions demand and partly as portfolio demand.

Question 13

To say that the relationship between the velocity of money and the opportunity cost of holding money is not stable is the same as saying:

Accepted Answer

A) the supply of money is not stable. 
B) the money market is always in disequilibrium. 
C) money demand is stable. 
D) money demand is not stable. 
A) the supply of money is not stable. 
B) the money market is always in disequilibrium. 
C) money demand is stable. 
D) money demand is not stable.

Question 14

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 15

The quantity theory of money along with the assumption of a constant velocity can explain which of the following?

Accepted Answer

A) At a given level of money growth, the higher the level of real growth the higher the level of inflation will be. 
B) At a given level of money growth, the higher the level of real growth the lower the level of inflation will be. 
C) If real growth is higher than money growth, the price level must be rising. 
D) If real growth equals money growth, the price level is falling. 
A) At a given level of money growth, the higher the level of real growth the higher the level of inflation will be. 
B) At a given level of money growth, the higher the level of real growth the lower the level of inflation will be. 
C) If real growth is higher than money growth, the price level must be rising. 
D) If real growth equals money growth, the price level is falling.

Question 16

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 17

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 18

In May of 2003, the European Central Bank (ECB) decided to:

Accepted Answer

A) focus almost exclusively on money growth as their target. 
B) downgrade the role of money growth in their policymaking strategy. 
C) limit the role of interest rate targeting to be second in importance to money growth targeting. 
D) switch from an inflation target to a money growth target. 
A) focus almost exclusively on money growth as their target. 
B) downgrade the role of money growth in their policymaking strategy. 
C) limit the role of interest rate targeting to be second in importance to money growth targeting. 
D) switch from an inflation target to a money growth target.

Question 19

A rate of inflation that exceeds the growth rate of money for a country could be explained by:

Accepted Answer

A) a growing real economy. 
B) a constant velocity of money. 
C) an increasing velocity of money. 
D) a decreasing velocity of money. 
A) a growing real economy. 
B) a constant velocity of money. 
C) an increasing velocity of money. 
D) a decreasing velocity of money.

Question 20

The demand for money varies:

Accepted Answer

A) directly with the liquidity of other financial assets. 
B) inversely with the liquidity of other financial assets. 
C) not all with the liquidity of other assets since money is liquid. 
D) inversely with wealth. 
A) directly with the liquidity of other financial assets. 
B) inversely with the liquidity of other financial assets. 
C) not all with the liquidity of other assets since money is liquid. 
D) inversely with wealth.

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

Which of the following would reflect the transactions demand for money?

Nobel-laureate economist Milton Friedman suggested that policymakers strive to ensure that the monetary aggregates:

Equilibrium in the money market would be expressed by which of the following?

If money growth and real output growth are both zero, the change in the price level will:

A major contributing factor to the instability of money demand over the past 25 years is the:

Using the equation of exchange, if real GDP increases by 3.0%, the velocity of money grows by 1.0% and the growth rate of money is 3.0%; what is the rate of inflation?

When nominal interest rates are high, the velocity of money should:

Statistical analysis reveals that the long-run money velocity (for euro-area M3, which is equivalent to U.S.M2):

Given that the velocity of money can be unstable in the short run, is this reason enough to dismiss money growth as a policy target? Explain.

Using the equation of exchange, if inflation is 1%, the velocity of money grows by 1.0% and the growth rate of money is 3.0%; what is real growth?

Which of the following statements is most correct?

Money held for precautionary reasons is included in the demand for money:

To say that the relationship between the velocity of money and the opportunity cost of holding money is not stable is the same as saying:

The opportunity cost of holding money is:

The quantity theory of money along with the assumption of a constant velocity can explain which of the following?

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

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

In May of 2003, the European Central Bank (ECB) decided to:

A rate of inflation that exceeds the growth rate of money for a country could be explained by:

The demand for money varies:

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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