Question 1

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

Accepted Answer

A)  You keep a $1,000 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 $1,000 limit 
C)  You put $1,000 in a savings account at your bank for emergencies 
D)  You put $1,000 in your checking account each month to cover your regular expenses

Question 2

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%.

Question 3

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.

Question 4

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.

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.

Question 6

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

The answer of How does money velocity contribute to the...

Question 7

During the period of October 1979 to October 1982; the FOMC's primary operating target resulted in:

Accepted Answer

A)  the most stable period for the federal funds rate in history. 
B)  reserves being highly volatile. 
C)  the federal funds rate experiencing high volatility. 
D)  the federal funds rate dropping to 2 percent (an all-time low to that date) and not rising above 3 percent.

Question 8

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

Question 9

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.

Question 10

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.

Question 11

The quantity theory of money can explain which of the following?

Accepted Answer

A)  If the %ΔY > 0 and the %ΔV = 0; the %ΔP  %ΔM 
D)  If the %ΔP > 0; the %ΔM must also be > 0

Question 12

Over the long run if central banks want to avoid high rates of inflation, they need to be concerned with the:

Accepted Answer

A)  unemployment rate. 
B)  money growth rate. 
C)  real economic growth rate. 
D)  productivity of labor.

Question 13

Is it a necessary condition that velocity is constant and that real output growth is assumed to be zero to have Milton Friedman's assertion that inflation is a monetary phenomenon be true?

Accepted Answer

The answer of Is it a necessary condition that velocity...

Question 14

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

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 15

To use money growth as a short-term monetary policy instrument, a central bank must:

Accepted Answer

A)  believe there is a stable link between the monetary base and the rate of inflation. 
B)  believe that only money matters. 
C)  believe that there is an unpredictable relationship between money aggregates and inflation. 
D)  believe the deposit expansion multiplier is volatile and unpredictable.

Question 16

Consider the following ratio: the average annual inflation rate/the average annual money growth rate. If a country's rate of money growth consistently exceeds the rate of inflation the ratio would be:

Accepted Answer

A)  less than one. 
B)  greater than one. 
C)  that is infinite. 
D)  exactly one.

Question 17

If the price of money is determined by supply and demand, what impact should a decrease in the supply of money (given steady money demand) have on the price of money and the rate of inflation?

Accepted Answer

The answer of If the price of money is determined...

Question 18

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.

Question 19

If an investor thinks interest rates are likely to rise, she would:

Accepted Answer

A)  sell her bonds and hold more money. 
B)  buy more bonds now and hold less money. 
C)  not alter her bond portfolio until interest rates actually rise. 
D)  not change her money holdings at all.

Question 20

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.

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