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CHAPTER 20
Question 1
Key assumptions behind the quantity theory of money include:
Answer
The money supply is fixed.
The velocity of money is constant.
The percentage change in the price level equals the percentage change in real
GDP.
The change in nominal GDP is zero.
4 points
Question 2
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:
Answer
The supply of money is not stable.
The money market is always in disequilibrium.
Money demand is stable.
Money demand is not stable.
4 points
Question 3
During economic slowdowns (recessions) the velocity of money tends to:
Answer
Remain relatively stable.
Increase slightly.
Increase dramatically.
Decrease.
4 points
Question 4
If real GDP stays the same but the price level increases:
Answer
Nominal money demand should remain the same.
Nominal money demand should decrease.
Nominal money demand should increase.
Real money demand should decrease.
4 points
Question 5
The demand for money varies:
Answer
Directly with the liquidity of other financial assets.
Inversely with the liquidity of other financial assets.
Not all with the liquidity of other assets since money is liquid.
Inversely with wealth.
4 points
Question 6
If your monthly income is $2000 and you receive it at the beginning of each month and
spend equal amounts each day to where on the last day of the month your balance is $0;
your average money holdings each month are:
Answer
$2000.
$66.67.
$1000.
$800.00.
4 points
Question 7
Which of the following statements best completes the sentence, “All other factors
constant, as the nominal interest rate increases, ….”?
Answer
The opportunity cost of money decreases, the velocity of money decreases,
and the quantity of money people want to hold decreases.
The opportunity cost of money increases, the velocity of money decreases,
and the quantity of money people want to hold decreases.
The opportunity cost of money decreases, the velocity of money increases,
and the quantity of money people want to hold decreases.
The opportunity cost of money increases, the velocity of money increases,
and the quantity of money people want to hold decreases.
4 points
Question 8
If M = the money supply; Y = real output, P = the price level, and V = velocity, which of
the following equals the income velocity of money?
Answer
(Y·M)/P
(P·M)/Y
(P·Y)/M
(P·Y) +M.
4 points
Question 9
If on average, a dollar is spent 4 times each year to purchase goods and services, the
velocity of money is:
Answer
One-fourth.
Four.
The money supply divided by 4
Nominal GDP divided by four.
4 points
Question 10
Which of the following would reflect the transaction demand for money?
Answer
Keeping funds in your checking account to pay your rent.
Keeping funds in your savings account because the interest rate looks
relatively attractive.
Selling common stocks you own and increasing the money in your savings
account because you think stock prices will fall soon.
a and c.
4 points
Question 11
The wide use of credit cards should have its greatest impact on reducing:
Answer
The portfolio demand for money.
The precautionary demand for money.
The transaction demand for money.
None of the above since credit cards aren't money.
4 points
Question 12
The portfolio demand for money reflects:
Answer
The money we hold for our everyday transactions.
The portion of wealth people desire to hold in the form of money.
The money we hold to purchase stocks and bonds and other financial
securities.
a and c
4 points
Question 13
A rate of inflation that exceeds the growth rate of money for a country could be explained
by:
Answer
A growing real economy.
A constant velocity of money.
An increasing velocity of money.
A decreasing velocity of money.
4 points
Question 14
Milton Friedman's assertion that “inflation is a monetary phenomenon” is based on:
Answer
The quantity theory of money
The assumption of constant nominal GDP growth.
The assumption that the price level grows at the same rate as real GDP.
The assumption that the central bank increases the money supply by a
constant rate every year.
4 points
Question 15
A decline in the yields earned by bonds should:
Answer
Not impact the demand for money since money doesn't earn any interest.
Also decrease the demand for money.
Increase the demand for money.
Increase the velocity of money.
4 points
Question 16
Equilibrium in the money market would be expressed by which of the following?
Answer
Ms = (1/V)Y
Ms = Md
Ms = (1/V)PY
a and b
b and c
4 points
Question 17
As a person's wealth increases we would expect the demand for money to:
Answer
Decrease.
Increase dollar for dollar with wealth.
Increase but at a rate less than dollar for dollar.
Money demand does not vary with wealth, only with income.
4 points
Question 18
History proves that:
Answer
Countries with low rates of money growth have high rates of inflation.
Money growth and inflation are not related.
Countries with high rates of money growth have high rates of inflation.
Money growth rates equal inflation rates.
4 points
Question 19
If the Fed were to tie the rate of money growth to the Consumer Price Index (CPI), the
rate of money growth might be excessive because:
Answer
The CPI does not measure inflation at the household level.
Most economists maintain the CPI overstates inflation by 2 to 4 percent
annually.
Most economists maintain the CPI overstates inflation by 1 percent annually.
Studies suggest that money growth is not related to the CPI.
4 points
Question 20
The fact that people can write drafts (checks) from many stock and money market
accounts has:
Answer
Increased the transaction demand for money.
Decreased the transaction demand for money.
This doesn't impact the transaction demand for money.
Increased the cost of converting non-money assets to a means of payment.
4 points
Question 21
In high inflation countries, inflation rates can exceed the rate of growth of money
because:
Answer
High inflation increases the velocity of money.
High rates of inflation increase the opportunity cost of holding money.
Money loses value quickly with inflation.
All of the above.
4 points
Question 22
If an investor thinks interest rates are likely to rise, she would:
Answer
Sell her bonds and hold more money.
Buy more bonds now and hold less money.
Not alter her bond portfolio until interest rates actually rise.
Not change her money holdings at all.
4 points
Question 23
If we let Md reflect money demand, then we can write the equation for money demand
as:
Answer
Md = VY.
Md = PY.
Md = (1/V) PY.
Md = V(Y/P).
4 points
Question 24
Crisis that occasionally hit financial markets will increase the demand for money since:
Answer
The return on money increases.
The return on financial assets increases.
There is no risk with holding money.
The risk of holding money relative to other financial assets decreases.
4 points
Question 25
The net cost of holding money is:
Answer
The nominal interest rate.
The real interest rate.
The nominal interest rate less the cost of converting a bond to cash.
The rate of inflation.
4 points