Question 1

Control of money growth to stabilize inflation only works if velocity were constant. In practice, changes in velocity:

Accepted Answer

A)  can safely be ignored in countries with relatively low inflation rates. 
B)  are important when inflation is low. 
C)  must be taken into account no matter what the inflation rate. 
D)  can always safely be ignored.

Question 2

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 answer of If the Fed wanted to keep inflation...

Question 3

The only solution available to a country experiencing extremely high rates of inflation is to:

Accepted Answer

A)  raise interest rates. 
B)  peg your currency to another country's currency. 
C)  reduce money growth. 
D)  revert to a gold standard.

Question 4

If you were going to write a function for money demand, you would say that the demand for money holdings:

Accepted Answer

A)  varies directly with both the nominal interest rate and nominal income. 
B)  varies inversely with both the nominal interest rate and nominal income. 
C)  varies inversely with nominal income and directly with the nominal interest rate. 
D)  varies inversely with the nominal interest rate and directly with nominal income.

Question 5

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.

Question 6

If the equation of exchange is MV = PY the Y represents:

Accepted Answer

A)  nominal GDP. 
B)  real GDP. 
C)  potential output. 
D)  economic growth.

Question 7

Economic researchers have found:

Accepted Answer

A)  no examples of countries with high rates of money growth and low inflation rates. 
B)  many examples of countries with low rates of money growth and high inflation rates. 
C)  many examples of countries with high rates of money growth and low inflation rates. 
D)  no relationship between rates of money growth and inflation rates.

Question 8

If velocity of money is constant; real growth in the output of the economy is +2.5%; and inflation is 2.0%; what is the growth rate of money?

Accepted Answer

The answer of If velocity of money is constant; real...

Question 9

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

Accepted Answer

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

Question 10

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%

Question 11

A cause of the decline in the velocity of money during the 2007-2009 financial crisis was a result of:

Accepted Answer

A)  the fiscal stimulus provided by the U.S. government. 
B)  the lowering of the discount rate by the Fed. 
C)  the use of unconventional policy tools by the Fed. 
D)  an increase in uncertainty.

Question 12

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.

Question 13

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

The answer of Professor Milton Friedman stated that "inflation is...

Question 14

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.

Question 15

Why does the Fed have to be concerned with money growth even though their main focus seems to be on interest rates?

Accepted Answer

The answer of Why does the Fed have to be...

Question 16

If the nominal interest rate decreases:

Accepted Answer

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

Question 17

You graduate from law school and can now begin charging clients fees for your time. What impact will this have on your demand for money?

Accepted Answer

A)  Your increased income will likely cause your demand for money to decrease 
B)  Your opportunity cost of making trips to the bank will decrease 
C)  Your increased income will likely cause your demand for money to increase 
D)  Your demand for money will not be affected

Question 18

All other factors equal, if the costs of converting bonds and other financial securities to a means of payment decrease:

Accepted Answer

A)  the transactions demand for money should increase. 
B)  the transactions demand for money should decrease. 
C)  it shouldn't impact the transactions demand for money. 
D)  nominal interest rates should decrease.

Question 19

The relationship between the velocity of money and interest rates is:

Accepted Answer

A)  positive but not stable. 
B)  negative but not stable. 
C)  positive and stable. 
D)  negative and stable.

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.

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