Question 1

According to the quantity theory of money, an increase in the money supply will result in

Accepted Answer

A)  an increase in nominal GDP
B)  an increase in velocity of equal magnitude
C)  a decrease in velocity of equal magnitude
D)  a decrease in money demand
E)  a proportional increase in real GDP

Question 2

Empirical studies done on money demand established that

Accepted Answer

A)  the demand for real money balances increases with increases in the interest rate
B)  the effects of income and interest rate changes on the demand for real money balances is more pronounced after a significant lag
C)  real money demand increases proportionately with the level of income
D)  people have money illusion since nominal money demand tends to increase less than proportionately with increases in the price level
E)  people will change their money holdings drastically if they expect a transitory change in interest rates

Question 3

If nominal GDP is $10,400 billion, M1 is $1,300 billion and M2 is $5,200 billion, then

Accepted Answer

A)  the income velocity of M1 is about four times as high as the income velocity of M2
B)  the income velocity of M1 is 1/4 of the income velocity of M2
C)  the income velocity of M2 must be 1/2
D)  the price level must be 2.0
E)  none of the above

Question 4

According to the quantity theory of money, a ten percent increase in the nominal money supply will lead to

Accepted Answer

A)  a ten percent increase in the real money supply
B)  a ten percent increase in real output
C)  a ten percent decrease in the interest rate
D)  a ten percent increase in the price level
E)  an offsetting decrease in the velocity of money

Question 5

The monetary aggregate M2 is defined as

Accepted Answer

A)  currency outstanding plus all demand deposits at commercial banks
B)  M1 plus close substitutes such as saving deposits, small time deposits, and money market mutual funds, which are easily converted into M1
C)  M1 plus all assets that can be changed into M1 within 6 months
D)  M1 plus credit and debit card balances
E)  all assets which are highly liquid but which themselves cannot be used for day-to-day transactions B

Question 6

If income taxes are lowered, we can expect that the income velocity of money will

Accepted Answer

A)  increase due to an increase in income and the interest rate
B)  decrease due to an increase in saving and money supply
C)  decrease since people will save more
D)  remain fairly stable since both income and prices will increase
E)  decrease since money supply will increase

Question 7

Money illusion occurs

Accepted Answer

A)  only in the classical case when the AS-curve is vertical
B)  only in the Keynesian model, in which prices are fixed
C)  only in a period of strong economic growth when real and nominal wages are rising at the same rate
D)  when people respond to nominal values rather than to real values
E)  when a change in the nominal money supply has no impact upon real values such as output or real wages

Question 8

From the behavior of the velocity of M2 during the period from the 1960s to the early 1990s, we can infer that

Accepted Answer

A)  velocity is not affected by changes in interest rates
B)   velocity has steadily decreased over time
C)  velocity has a tendency to rise and fall with interest rates
D)   velocity always is inversely related to interest rates
E)  the value of velocity is highly variable but always exceeds 5

Question 9

When we have inflation, the opportunity cost of holding nominal money balances is

Accepted Answer

A)  the real interest rate
B)  the nominal interest rate
C)  the nominal interest rate or the inflation rate, whichever is higher
D)  the nominal interest rate minus the rate of inflation
E)  the yield on long-term government bonds

Question 10

If the government implements a restrictive fiscal policy, then

Accepted Answer

A)  the income velocity of money should increase
B)  the income velocity of money should decrease
C)  the income velocity of money should remain unaffected
D)  money demand should increase since people have to pay more taxes
E)  money demand and the income velocity of money should both decrease B

Question 11

Advantages of holding money rather than less liquid assets such as bonds or stocks include

Accepted Answer

A)    	the ability to engage in day-to-day transactions with ease and convenience
B)    	the ability to take advantage of unforeseen opportunities to make potentially profitable purchases
C)  	the lowering of overall portfolio risk 
D)  	protection against loss in the market values of other assets in periods of rising interest rates 
E)    	all of the above

Question 12

Money demand adjusts to changes in income and interest rates only with a lag since

Accepted Answer

A)  there are always costs associated with adjusting money holdings
B)  money holders' expectations are often slow to adjust
C)  it is costly and time consuming to figure out new ways to manage money or open a new account if that becomes necessary
D)  people are unwilling to make major changes in money holdings if they are unsure whether interest rate changes are permanent or temporary
E)  all of the above

Question 13

The demand for money (M2)  remained relatively stable from the 1960s through the early 1990s since, over this time period,

Accepted Answer

A)  the income elasticity of demand for M2 was close to 0
B)  yields on M2 assets rose more than proportionally with interest rates on money market instruments
C)  the opportunity cost of holding M2 assets changed very little
D)  the money demand function for M1 was also very stable
E)  all of the above

Question 14

The demand for money for precautionary reasons

Accepted Answer

A)  increases as the interest rate on non-money assets decreases
B)  decreases as the cost of illiquidity decreases
C)  increases as the anticipated cash flow decreases, increasing the probability of illiquidity
D)  decreases as receipts and expenditures are known with more certainty
E)  all of the above

Question 15

The introduction of NOW-accounts (interest-earning checking accounts)  in 1980 led to

Accepted Answer

A)  transfers from passbook saving deposits into NOW-accounts
B)  an increase in M1, while leaving M2 unchanged
C)  a decrease in the income velocity of M1
D)  all of the above
E)  none of the above

Question 16

If real GDP is $9,600 billion, nominal money supply is M is $5,200 billion, and income velocity of money is V = 2, what is the approximate value of the GDP-deflator?

Accepted Answer

A)  3) 70
B)  1) 84
C)  1) 08
D)  0) 92
E)  0) 84

Question 17

If the income elasticity of money demand is less than 1, then

Accepted Answer

A)  the income velocity of money will increase as the level of income increases
B)  the income velocity of money will decrease as the level of income increases
C)   the income velocity of money will remain constant over time
D)   the income velocity of money will increase with an increase in money demand
E)  an increase in income is always less than the resulting increase in money demand A

Question 18

Assume we know that the income velocity of M2 has remained constant, while M2 has increased by 6% and prices have increased by 4%.We can conclude that

Accepted Answer

A)  real GDP has grown by 2%
B)  nominal GDP has grown by 10%
C)  real GDP has grown by 1.5%
D)  real GDP has decreased by 1.5%
E)  nominal GDP has decreased by 2%

Question 19

Which of the following affected the demand for M2?

Accepted Answer

A)  the introduction of interest-earning checking accounts
B)  the introduction of ATMs that allow instant withdrawals from saving accounts
C)  increased use of credit cards
D)  an increase in the yield of government bonds
E)  all of the above

Question 20

People who expect a very high inflation rate may

Accepted Answer

A)  prefer to hold goods instead of money
B)  decrease the speed with which they spend their money, thereby decreasing velocity
C)  shift their money from time deposits to demand deposits
D)  increase their demand for real money balances in order to be able to purchase higher-priced goods later
E)  none of the above

Exam 16: The demand for money

According to the quantity theory of money, an increase in the money supply will result in

Correct AnswerverifiedShow Answer

Empirical studies done on money demand established that

Correct AnswerverifiedShow Answer

If nominal GDP is $10,400 billion, M1 is $1,300 billion and M2 is $5,200 billion, then

Correct AnswerverifiedShow Answer

According to the quantity theory of money, a ten percent increase in the nominal money supply will lead to

Correct AnswerverifiedShow Answer

The monetary aggregate M2 is defined as

Correct AnswerverifiedB

If income taxes are lowered, we can expect that the income velocity of money will

Correct AnswerverifiedShow Answer

Money illusion occurs

Correct AnswerverifiedShow Answer

From the behavior of the velocity of M2 during the period from the 1960s to the early 1990s, we can infer that

Correct AnswerverifiedShow Answer

When we have inflation, the opportunity cost of holding nominal money balances is

Correct AnswerverifiedShow Answer

If the government implements a restrictive fiscal policy, then

Correct AnswerverifiedB

Advantages of holding money rather than less liquid assets such as bonds or stocks include

Correct AnswerverifiedShow Answer

Money demand adjusts to changes in income and interest rates only with a lag since

Correct AnswerverifiedShow Answer

The demand for money (M2) remained relatively stable from the 1960s through the early 1990s since, over this time period,

Correct AnswerverifiedShow Answer

The demand for money for precautionary reasons

Correct AnswerverifiedShow Answer

The introduction of NOW-accounts (interest-earning checking accounts) in 1980 led to

Correct AnswerverifiedShow Answer

If real GDP is $9,600 billion, nominal money supply is M is $5,200 billion, and income velocity of money is V = 2, what is the approximate value of the GDP-deflator?

Correct AnswerverifiedShow Answer

If the income elasticity of money demand is less than 1, then

Correct AnswerverifiedA

Assume we know that the income velocity of M2 has remained constant, while M2 has increased by 6% and prices have increased by 4%.We can conclude that

Correct AnswerverifiedShow Answer

Which of the following affected the demand for M2?

Correct AnswerverifiedShow Answer

People who expect a very high inflation rate may

Correct AnswerverifiedShow Answer

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B

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B

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A

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