Question 1

Which of the following would be classified as precautionary demand for money?

Accepted Answer

A) You keep a $1000 in a money market account because the return is better than a savings account at your bank 
B) You apply for and receive a credit card with a $1000 limit 
C) You put $1000 in a savings account at your bank for emergencies 
D) You put $1000 in your checking account each month to cover your regular expenses 
A) You keep a $1000 in a money market account because the return is better than a savings account at your bank 
B) You apply for and receive a credit card with a $1000 limit 
C) You put $1000 in a savings account at your bank for emergencies 
D) You put $1000 in your checking account each month to cover your regular expenses C

Question 2

The equation for money demand expressed in the chapter that is derived from the equation of exchange is: $M ^ { d } = \frac { 1 } { V } P Y$

Accepted Answer

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.
Professor Fisher made two assumptions, one was velocity (V) was determined by institutional structures that would not change quickly and that the real output of the economy (Y) was determined by economic inputs and the production function.Basically then, Professor Fisher must have assumed the only plausible role for money was for transactions, he never viewed or he dismissed the speculative or wealth (portfolio) holding roles for money.This might make sense if he thought that since money holdings do not earn interest that people would never hold more money than what was needed for transactions since they would not want to give up any interest that they otherwise could have earned.If Professor Fisher were alive today, he certainly would be interested in the short term volatility of velocity and he would likely view the 1/V as something other than a constant, realizing that velocity of money can be influenced by interest rates.

Question 3

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 accurately forecast shifts in money demand, they cannot accurately forecast (predict) shifts in the velocity of money.As a result, if they try to target reserves or money growth, they potentially will create an environment of volatile interest rates, which would be very damaging to the real economy.Since this volatility and resulting damage is exactly what central bankers hope to avoid, they turn to the only viable short-term operating target left which is smoothing fluctuations in the interest rate.

Question 4

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 relationship between the quantity of money and the rate of inflation 
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 relationship between the quantity of money and the rate of inflation 
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 5

The interest rate earned on money holdings is:

Accepted Answer

A) The nominal interest rate 
B) The nominal interest rate less the rate of inflation 
C) The real interest rate less the rate of inflation 
D) Zero 
A) The nominal interest rate 
B) The nominal interest rate less the rate of inflation 
C) The real interest rate less the rate of inflation 
D) Zero

Question 6

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 7

Consider the following ratio: the average annual inflation rate/the average annual money growth rate.A country with a ratio less than one would have:

Accepted Answer

A) An average inflation rate greater than the average rate of money growth 
B) An average inflation rate less than the average rate of money growth 
C) To have a high unemployment rate 
D) An economy suffering from a recession 
A) An average inflation rate greater than the average rate of money growth 
B) An average inflation rate less than the average rate of money growth 
C) To have a high unemployment rate 
D) An economy suffering from a recession

Question 8

Between 1970 and 2000, the Fed:

Accepted Answer

A) Published their targets for money growth and often hit these targets 
B) Never published targets or actual amounts for money growth 
C) Published targets for money growth and rarely hit them 
D) Published actual money growth but not targets 
A) Published their targets for money growth and often hit these targets 
B) Never published targets or actual amounts for money growth 
C) Published targets for money growth and rarely hit them 
D) Published actual money growth but not targets

Question 9

If we let Md reflect money demand, then we can write the equation for money demand as:

Accepted Answer

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

Question 10

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 11

Professor Milton Friedman stated that "inflation is a monetary phenomenon." What did he mean by this statement and what is the basis for this assertion?

Accepted Answer

Professor Friedman meant that the source

Question 12

When the currency loses value, causing people to spend it more quickly, this:

Accepted Answer

A) Has the same effect on inflation as an increase in money growth 
B) Has the same effect on inflation as a decrease in money growth 
C) Causes higher inflation but not as much as an increase in money growth would 
D) Causes even higher inflation than an increase in money growth would 
A) Has the same effect on inflation as an increase in money growth 
B) Has the same effect on inflation as a decrease in money growth 
C) Causes higher inflation but not as much as an increase in money growth would 
D) Causes even higher inflation than an increase in money growth would

Question 13

When the former Soviet Union collapsed in 1990, most of the countries that made up the union experienced extremely high rate of inflation? What was the source of the high inflation and why did it happen?

Accepted Answer

The source of the high inflation in thos

Question 14

If money were valued in terms of how many minutes a person needs to work to buy a dollar, an increase in the number of minutes of work needed would be:

Accepted Answer

A) A decline in the price of money 
B) An increase in the price of money 
C) No change in the real price of money, just the nominal price increases 
D) No change in the real or nominal price of money 
A) A decline in the price of money 
B) An increase in the price of money 
C) No change in the real price of money, just the nominal price increases 
D) No change in the real or nominal price of money

Question 15

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 16

Explain why "free" checking accounts are not really free.

Accepted Answer

Even some bankers suggest that "free" ch

Question 17

If the nominal interest rate increases:

Accepted Answer

A) The cost of holding money decreases 
B) The cost of holding money increases 
C) The velocity of money should decrease 
D) The cost of holding money increases and the velocity of money should decrease 
A) The cost of holding money decreases 
B) The cost of holding money increases 
C) The velocity of money should decrease 
D) The cost of holding money increases and the velocity of money should decrease

Question 18

All other factors equal, as nominal interest rates decrease, checking account balances should:

Accepted Answer

A) Increase 
B) Decrease 
C) Remain constant 
D) Be converted to cash 
A) Increase 
B) Decrease 
C) Remain constant 
D) Be converted to cash

Question 19

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

Question 20

The wide use of credit cards should have its greatest impact on reducing:

Accepted Answer

A) The portfolio demand for money 
B) The precautionary demand for money 
C) The transaction demand for money 
D) None of the answers given is correct since credit cards aren't money 
A) The portfolio demand for money 
B) The precautionary demand for money 
C) The transaction demand for money 
D) None of the answers given is correct since credit cards aren't money

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

Which of the following would be classified as precautionary demand for money?

The equation for money demand expressed in the chapter that is derived from the equation of exchange is: Md=1VPYM ^ { d } = \frac { 1 } { V } P YMd=V1​PY

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?

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

The interest rate earned on money holdings is:

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

Consider the following ratio: the average annual inflation rate/the average annual money growth rate.A country with a ratio less than one would have:

Between 1970 and 2000, the Fed:

If we let Md reflect money demand, then we can write the equation for money demand as:

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:

Professor Milton Friedman stated that "inflation is a monetary phenomenon." What did he mean by this statement and what is the basis for this assertion?

When the currency loses value, causing people to spend it more quickly, this:

When the former Soviet Union collapsed in 1990, most of the countries that made up the union experienced extremely high rate of inflation? What was the source of the high inflation and why did it happen?

If money were valued in terms of how many minutes a person needs to work to buy a dollar, an increase in the number of minutes of work needed would be:

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

Explain why "free" checking accounts are not really free.

If the nominal interest rate increases:

All other factors equal, as nominal interest rates decrease, checking account balances should:

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?

The wide use of credit cards should have its greatest impact on reducing:

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

Filters

The equation for money demand expressed in the chapter that is derived from the equation of exchange is: $M ^ { d } = \frac { 1 } { V } P Y$