Question 1

Keynes believed that people would hold less of their wealth in money when interest rates were high because

Accepted Answer

A) the opportunity cost of holding money would be low. 
B) they would expect a capital gain from holding bonds. 
C) they would expect a capital loss from holding bonds. 
D) when interest rates are high they tend to rise even higher. 
A) the opportunity cost of holding money would be low. 
B) they would expect a capital gain from holding bonds. 
C) they would expect a capital loss from holding bonds. 
D) when interest rates are high they tend to rise even higher. B

Question 2

According to Milton Friedman, permanent income is

Accepted Answer

A) income received for a specific period of time under a contract. 
B) nominal income divided by the price level. 
C) expected average income over a lifetime. 
D) income received as interest payments on financial assets. 
A) income received for a specific period of time under a contract. 
B) nominal income divided by the price level. 
C) expected average income over a lifetime. 
D) income received as interest payments on financial assets. C

Question 3

The inclusion in M1 of interest-bearing substitutes for conventional checkable deposits in the early 1980s

Accepted Answer

A) increased the demand for M1 at each level of nominal GDP, thereby decreasing velocity. 
B) decreased the demand for M1 at each level of nominal GDP, thereby increasing velocity. 
C) increased the demand for M1 at each level of nominal GDP, thereby increasing velocity. 
D) decreased the demand for M1 at each level of nominal GDP, thereby decreasing velocity. 
A) increased the demand for M1 at each level of nominal GDP, thereby decreasing velocity. 
B) decreased the demand for M1 at each level of nominal GDP, thereby increasing velocity. 
C) increased the demand for M1 at each level of nominal GDP, thereby increasing velocity. 
D) decreased the demand for M1 at each level of nominal GDP, thereby decreasing velocity. A

Question 4

People's decision to hold money based on the comparison of the relative returns of money and nonmoney assets is known as

Accepted Answer

A) speculative motive. 
B) precautionary motive. 
C) transactions motive. 
D) liquidity motive. 
A) speculative motive. 
B) precautionary motive. 
C) transactions motive. 
D) liquidity motive.

Question 5

According to Friedman, the opportunity cost of holding money is determined by all of the following EXCEPT

Accepted Answer

A) expected inflation. 
B) permanent income. 
C) interest rate. 
D) return on money. 
A) expected inflation. 
B) permanent income. 
C) interest rate. 
D) return on money.

Question 6

The liquidity preference theory emphasizes

Accepted Answer

A) the transactions motive for holding money. 
B) the sensitivity of money demand to changes in interest rates. 
C) the precautionary motive for holding money. 
D) the effect of price level changes on the demand for real balances. 
A) the transactions motive for holding money. 
B) the sensitivity of money demand to changes in interest rates. 
C) the precautionary motive for holding money. 
D) the effect of price level changes on the demand for real balances.

Question 7

Stephen Goldfeld's estimate of the demand for money failed to predict the actual level of M1 demanded in the years after 1973 because

Accepted Answer

A) nominal interest rates fell to very low levels during those years. 
B) financial innovation produced substitutes for checkable deposits. 
C) the economy suffered through several recessions. 
D) the Fed unexpectedly decided to decrease the rate of growth of M1. 
A) nominal interest rates fell to very low levels during those years. 
B) financial innovation produced substitutes for checkable deposits. 
C) the economy suffered through several recessions. 
D) the Fed unexpectedly decided to decrease the rate of growth of M1.

Question 8

Keynes assumed that the expected return on bonds is determined by

Accepted Answer

A) the interest rate on the bond. 
B) the interest rate on the bond adjusted for expectations of capital gains or losses on the bond. 
C) the interest rate on the bond adjusted for the expected inflation rate. 
D) the expected inflation rate adjusted for expectations of capital gains or losses on the bond. 
A) the interest rate on the bond. 
B) the interest rate on the bond adjusted for expectations of capital gains or losses on the bond. 
C) the interest rate on the bond adjusted for the expected inflation rate. 
D) the expected inflation rate adjusted for expectations of capital gains or losses on the bond.

Question 9

Why do economists and policy-makers view fluctuations in velocity as a problem? What action did the Fed take in the late 1990s that was related to uncertainty about the behavior of velocity?

Accepted Answer

Unpredictable changes in velocity make i

Question 10

Fluctuations in velocity indicate that

Accepted Answer

A) changes in money holdings cannot be completely explained by changes in the price level. 
B) changes in money holdings cannot be completely explained by changes in the volume of transactions. 
C) the Fed will have an easier time in hitting monetary aggregate targets than in hitting interest rate targets. 
D) inflation must be accelerating. 
A) changes in money holdings cannot be completely explained by changes in the price level. 
B) changes in money holdings cannot be completely explained by changes in the volume of transactions. 
C) the Fed will have an easier time in hitting monetary aggregate targets than in hitting interest rate targets. 
D) inflation must be accelerating.

Question 11

Which of the following is NOT considered an important determinant of money demand?

Accepted Answer

A) The average personal income tax rate 
B) Real income 
C) Payments system developments 
D) The difference between the nominal interest rate and the yield on money 
A) The average personal income tax rate 
B) Real income 
C) Payments system developments 
D) The difference between the nominal interest rate and the yield on money

Question 12

From 1959 to 1989, M2 velocity

Accepted Answer

A) declined sharply. 
B) increased sharply. 
C) declined during the 1960s and then increased during the 1970s and 1980s. 
D) was stable. 
A) declined sharply. 
B) increased sharply. 
C) declined during the 1960s and then increased during the 1970s and 1980s. 
D) was stable.

Question 13

Which of the following would cause demand for M1 to increase?

Accepted Answer

A) Banks make taking out home equity loans easier. 
B) The market for closed-end stock mutual funds becomes more liquid. 
C) Early withdrawal penalties for certificates of deposit are eliminated. 
D) Several major corporations default on their commercial paper. 
A) Banks make taking out home equity loans easier. 
B) The market for closed-end stock mutual funds becomes more liquid. 
C) Early withdrawal penalties for certificates of deposit are eliminated. 
D) Several major corporations default on their commercial paper.

Question 14

Irving Fisher converted the equation of exchange into a theory of money demand by assuming that

Accepted Answer

A) nominal balances always equal real balances. 
B) velocity is a constant. 
C) inflation is always zero. 
D) short-term interest rates always equal long-term interest rates. 
A) nominal balances always equal real balances. 
B) velocity is a constant. 
C) inflation is always zero. 
D) short-term interest rates always equal long-term interest rates.

Question 15

Which model of the demand for real balances discussed in this chapter relies solely on the transactions motive? Is this model able completely to explain observed movements in real balances? Briefly explain why or why not.

Accepted Answer

The quantity theory of money demand reli

Question 16

The American economist who developed the quantity theory of money demand in the early 1900s was

Accepted Answer

A) Milton Friedman. 
B) John Maynard Keynes. 
C) Glenn Hubbard. 
D) Irving Fisher. 
A) Milton Friedman. 
B) John Maynard Keynes. 
C) Glenn Hubbard. 
D) Irving Fisher.

Question 17

An individual with a high income will probably

Accepted Answer

A) hold a smaller fraction of her wealth in the form of money than will an individual with a low income. 
B) hold a larger fraction of her wealth in the form of money than will an individual with a low income. 
C) hold the same fraction of her wealth in the form of money as will an individual with a low income. 
D) hold a smaller fraction of her wealth in the form of money than will a large corporation. 
A) hold a smaller fraction of her wealth in the form of money than will an individual with a low income. 
B) hold a larger fraction of her wealth in the form of money than will an individual with a low income. 
C) hold the same fraction of her wealth in the form of money as will an individual with a low income. 
D) hold a smaller fraction of her wealth in the form of money than will a large corporation.

Question 18

George has total wealth of $50,000. He allocates $40,000 to Treasury bills yielding 6% and $10,000 to a NOW account yielding 3%. What value does George place on his checkable deposits? What if the yield on T-bills rises to 12%?

Accepted Answer

Implicitly, George values the liquidity

Question 19

In which of the following books did J. M. Keynes first present the liquidity preference theory of the demand for money?

Accepted Answer

A) Money through the Ages 
B) The Theory of Interest 
C) The General Theory of Employment, Interest, and Money 
D) Money, Banking, and the Economy 
A) Money through the Ages 
B) The Theory of Interest 
C) The General Theory of Employment, Interest, and Money 
D) Money, Banking, and the Economy

Question 20

According to Keynes, the demand for real balances is best expressed by which of the following equations?

Accepted Answer

A) M/P = (1/V)Y 
B) M/P = L(Y, i) 
C) M/P = L(Y, i - iM, πe - iM ) 
D) M/V = PY 
A) M/P = (1/V)Y 
B) M/P = L(Y, i) 
C) M/P = L(Y, i - iM, πe - iM ) 
D) M/V = PY

Exam 23: The Demand for Money

Keynes believed that people would hold less of their wealth in money when interest rates were high because

According to Milton Friedman, permanent income is

The inclusion in M1 of interest-bearing substitutes for conventional checkable deposits in the early 1980s

People's decision to hold money based on the comparison of the relative returns of money and nonmoney assets is known as

According to Friedman, the opportunity cost of holding money is determined by all of the following EXCEPT

The liquidity preference theory emphasizes

Stephen Goldfeld's estimate of the demand for money failed to predict the actual level of M1 demanded in the years after 1973 because

Keynes assumed that the expected return on bonds is determined by

Why do economists and policy-makers view fluctuations in velocity as a problem? What action did the Fed take in the late 1990s that was related to uncertainty about the behavior of velocity?

Fluctuations in velocity indicate that

Which of the following is NOT considered an important determinant of money demand?

From 1959 to 1989, M2 velocity

Which of the following would cause demand for M1 to increase?

Irving Fisher converted the equation of exchange into a theory of money demand by assuming that

Which model of the demand for real balances discussed in this chapter relies solely on the transactions motive? Is this model able completely to explain observed movements in real balances? Briefly explain why or why not.

The American economist who developed the quantity theory of money demand in the early 1900s was

An individual with a high income will probably

George has total wealth of $50,000. He allocates $40,000 to Treasury bills yielding 6% and $10,000 to a NOW account yielding 3%. What value does George place on his checkable deposits? What if the yield on T-bills rises to 12%?

In which of the following books did J. M. Keynes first present the liquidity preference theory of the demand for money?

According to Keynes, the demand for real balances is best expressed by which of the following equations?

Introducing Money and the Financial System

Money and the Payments System

Overview of the Financial System

Interest Rates and Rates of Return

The Theory of Portfolio Allocation

Determining Market Interest Rates

Risk Structure and Term Structure of Interest Rates

The Foreign-Exchange Market and Exchange Rates

Derivative Securities and Derivative Markets

Information and Financial Market Efficiency

Reducing Transactions Costs and Information Costs

What Financial Institutions Do

The Business of Banking

The Banking Industry

Banking Regulation: Crisis and Response

Banking in the International Economy

The Money Supply Process

Changes in the Monetary Base

Organization of Central Banks

Monetary Policy Tools

The Conduct of Monetary Policy

The International Financial System and Monetary Policy

Linking the Financial System and the Economy: the Is-Lm-Fe Model

Aggregate Demand and Aggregate Supply

Money and Output in the Short Run

Information Problems and Channels for Monetary Policy

Inflation: Causes and Consequences

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