Question 1

If real GDP is $9,600 billion and nominal money supply is $1,200 billion, then

Accepted Answer

A) the income velocity of money is 8.0 
B) the price level is 8.0 
C) the income velocity of money is 1.25 
D) the price level is 1.25 
E) none of the above 
A) the income velocity of money is 8.0 
B) the price level is 8.0 
C) the income velocity of money is 1.25 
D) the price level is 1.25 
E) none of the above

Question 2

If the income velocity of money were V = 2, then

Accepted Answer

A) the demand for money would be two times the level of income 
B) money demand for transactions would be 1/2 of the level of income 
C) the increase in money supply would always be two times the increase in real GDP 
D) a money supply of $6.3 trillion could support a nominal GDP of $12.6 trillion 
E) a money supply of $1.2 trillion could support real a GDP of $9.6 trillion 
A) the demand for money would be two times the level of income 
B) money demand for transactions would be 1/2 of the level of income 
C) the increase in money supply would always be two times the increase in real GDP 
D) a money supply of $6.3 trillion could support a nominal GDP of $12.6 trillion 
E) a money supply of $1.2 trillion could support real a GDP of $9.6 trillion

Question 3

If real GDP increased by 3% over the next year, we should expect

Accepted Answer

A) a decrease in demand for M1 by 3% 
B) an increase in demand for M1 by 3% 
C) an increase in demand for M1 by more than 3% 
D) an increase in demand for M1 by less than 3% 
E) no change in demand for M1 
A) a decrease in demand for M1 by 3% 
B) an increase in demand for M1 by 3% 
C) an increase in demand for M1 by more than 3% 
D) an increase in demand for M1 by less than 3% 
E) no change in demand for M1

Question 4

The proportion of money held as a safe asset in an investor's portfolio

Accepted Answer

A) increases as the need to hedge against inflation becomes greater 
B) may be less important for wealthier investors who can hedge risks through diversification 
C) increases when interest rates increase 
D) is larger for the wealthy than for the poor 
E) should always be at least 50% of the total portfolio 
A) increases as the need to hedge against inflation becomes greater 
B) may be less important for wealthier investors who can hedge risks through diversification 
C) increases when interest rates increase 
D) is larger for the wealthy than for the poor 
E) should always be at least 50% of the total portfolio

Question 5

The Baumol-Tobin square-root formula predicts that if banks levy hefty fees for withdrawals made from savings accounts, then

Accepted Answer

A) the income velocity of M1 will most likely increase 
B) the amount of money balances held as M1 will most likely decrease 
C) the income velocity of M2 will most likely decrease 
D) the amount of money balances held as M2 will most likely be unaffected 
E) all of the above 
A) the income velocity of M1 will most likely increase 
B) the amount of money balances held as M1 will most likely decrease 
C) the income velocity of M2 will most likely decrease 
D) the amount of money balances held as M2 will most likely be unaffected 
E) all of the above

Question 6

Which of the following is NOT an example of a precautionary money balance?

Accepted Answer

A) currency in a cash register at a department store 
B) an extra $20 bill in the purse of a college student going on her first blind date 
C) a $100 traveler's check, folded and placed behind your driver's license in your wallet 
D) funds deposited in a separate bank account because you may need to replace an aging furnace 
E) an extra $100 in cash withdrawn from your savings account before you take a trip to visit a sick aunt, just in case you find a garage sale along the way 
A) currency in a cash register at a department store 
B) an extra $20 bill in the purse of a college student going on her first blind date 
C) a $100 traveler's check, folded and placed behind your driver's license in your wallet 
D) funds deposited in a separate bank account because you may need to replace an aging furnace 
E) an extra $100 in cash withdrawn from your savings account before you take a trip to visit a sick aunt, just in case you find a garage sale along the way

Question 7

A disadvantage of holding money rather than bonds is that bonds

Accepted Answer

A) increase in value as the interest rate goes up 
B) lower the overall portfolio risk while money doesn't 
C) generally have a higher yield than money 
D) never lose purchasing power 
E) are always backed by the government 
A) increase in value as the interest rate goes up 
B) lower the overall portfolio risk while money doesn't 
C) generally have a higher yield than money 
D) never lose purchasing power 
E) are always backed by the government

Question 8

If restrictive fiscal policy is combined with expansionary monetary policy to reduce interest rates without changing income, then

Accepted Answer

A) the income velocity of money should not change 
B) the income velocity of money should decrease 
C) the demand for money (M1) should not change 
D) the demand for money (M1)should decrease 
E) both money demand and velocity of M1 should decrease 
A) the income velocity of money should not change 
B) the income velocity of money should decrease 
C) the demand for money (M1) should not change 
D) the demand for money (M1)should decrease 
E) both money demand and velocity of M1 should decrease

Question 9

Which of the following functions does money NOT serve very well?

Accepted Answer

A) as a unit of account 
B) as a standard of deferred payment 
C) as a protection against high inflation 
D) as a store of value 
E) as a medium of exchange 
A) as a unit of account 
B) as a standard of deferred payment 
C) as a protection against high inflation 
D) as a store of value 
E) as a medium of exchange

Question 10

If the income elasticity of demand for M2 is close to +1, then

Accepted Answer

A) demand for M2 will more than double if the level of income doubles 
B) M2 is not a good intermediate target for monetary policy 
C) the income velocity of M2 will vary greatly with changes in income 
D) the income velocity of M2 will not be affected by interest rate changes 
E) changes in income should not significantly affect the income velocity of M2 
A) demand for M2 will more than double if the level of income doubles 
B) M2 is not a good intermediate target for monetary policy 
C) the income velocity of M2 will vary greatly with changes in income 
D) the income velocity of M2 will not be affected by interest rate changes 
E) changes in income should not significantly affect the income velocity of M2

Question 11

If real GDP has grown at a rate of 3%, but nominal money supply and the price level have both grown by 5%, then the income velocity of money must have

Accepted Answer

A) stayed constant 
B) decreased by 2% 
C) decreased by 3% 
D) increased by 3% 
E) increased by 8% 
A) stayed constant 
B) decreased by 2% 
C) decreased by 3% 
D) increased by 3% 
E) increased by 8%

Question 12

Any item can function as a medium of exchange

Accepted Answer

A) as long as the item is easily available 
B) as long as the item is generally accepted in trade for most goods and services and for repayment of debt 
C) but only if it is backed by some precious metal 
D) but only if the item has been issued by the Federal Reserve for use as a medium of exchange 
E) but only if the Treasury Department has designated that item as a medium of exchange 
A) as long as the item is easily available 
B) as long as the item is generally accepted in trade for most goods and services and for repayment of debt 
C) but only if it is backed by some precious metal 
D) but only if the item has been issued by the Federal Reserve for use as a medium of exchange 
E) but only if the Treasury Department has designated that item as a medium of exchange

Question 13

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

Accepted Answer

A) the velocity of money must decrease as the level of income increases 
B) income can never increase faster than money supply 
C) changes in the interest rate will never affect money demand 
D) an increase in income will be reflected in a proportionately smaller increase in money demand 
E) an increase in income will be reflected in a proportionately larger increase in money demand 
A) the velocity of money must decrease as the level of income increases 
B) income can never increase faster than money supply 
C) changes in the interest rate will never affect money demand 
D) an increase in income will be reflected in a proportionately smaller increase in money demand 
E) an increase in income will be reflected in a proportionately larger increase in money demand

Question 14

Assume nominal money supply grows by 6% and real GDP grows by 4%.We can conclude that the rate of inflation is about

Accepted Answer

A) +6% 
B) +2% 
C) +6% minus the percentage change in velocity 
D) +2% minus the percentage change in velocity 
E) +2% plus the percentage change in velocity 
A) +6% 
B) +2% 
C) +6% minus the percentage change in velocity 
D) +2% minus the percentage change in velocity 
E) +2% plus the percentage change in velocity

Question 15

The precautionary demand for money will increase with

Accepted Answer

A) increased use of credit cards 
B) higher interest rates 
C) a decrease in the desire to avoid risk 
D) harsher consequences for unpaid bills 
E) none of the above 
A) increased use of credit cards 
B) higher interest rates 
C) a decrease in the desire to avoid risk 
D) harsher consequences for unpaid bills 
E) none of the above

Question 16

Which of the following assumptions is not part of the quantity theory of money?

Accepted Answer

A) the economy is assumed to be at full employment 
B) velocity is assumed to be unpredictable 
C) changes in nominal money supply and the price level are assumed to be proportional 
D) changes in nominal GDP and nominal money supply are assumed to be proportional 
E) inflation is assumed to be caused by too much monetary growth 
A) the economy is assumed to be at full employment 
B) velocity is assumed to be unpredictable 
C) changes in nominal money supply and the price level are assumed to be proportional 
D) changes in nominal GDP and nominal money supply are assumed to be proportional 
E) inflation is assumed to be caused by too much monetary growth

Question 17

The speculative demand for money

Accepted Answer

A) can clearly be separated from money demand for transaction since the latter is not affected by interest rate changes 
B) is affected by changes in equity yields but not by interest rate changes on bank deposits 
C) will always increase proportionally to the precautionary demand for money 
D) is almost always close to zero since asset holders try to avoid holding money 
E) none of the above 
A) can clearly be separated from money demand for transaction since the latter is not affected by interest rate changes 
B) is affected by changes in equity yields but not by interest rate changes on bank deposits 
C) will always increase proportionally to the precautionary demand for money 
D) is almost always close to zero since asset holders try to avoid holding money 
E) none of the above

Question 18

In which of the following cases would the owner of a delicatessen hold more precautionary money balances?

Accepted Answer

A) if the store's credit line is cut in half by its bank 
B)  if receipts and expenditures are both expected to decrease proportionally 
C) if yields on interest earning assets have substantially increased 
D) if the rate of inflation has sharply increased 
E) all of the above 
A) if the store's credit line is cut in half by its bank 
B)  if receipts and expenditures are both expected to decrease proportionally 
C) if yields on interest earning assets have substantially increased 
D) if the rate of inflation has sharply increased 
E) all of the above

Question 19

According to the Baumol-Tobin square-root formula, money demand for transactions

Accepted Answer

A) depends only on the level of income 
B) depends only on the cost of illiquidity 
C) varies inversely with both the interest rate and the level of income 
D) increases as the interest rate decreases or income increases 
E) decreases as the cost of illiquidity increases 
A) depends only on the level of income 
B) depends only on the cost of illiquidity 
C) varies inversely with both the interest rate and the level of income 
D) increases as the interest rate decreases or income increases 
E) decreases as the cost of illiquidity increases

Question 20

Empirical studies done on money demand established that

Accepted Answer

A) the income elasticity of money demand (M1)is greater than 1 
B) the income elasticity of money demand (M1) is equal to 1 
C) the income elasticity of money demand (M1) is larger in the long run than in the short run 
D) the interest elasticity of money demand (M1)is close to -1 
E) none of the above 
A) the income elasticity of money demand (M1)is greater than 1 
B) the income elasticity of money demand (M1) is equal to 1 
C) the income elasticity of money demand (M1) is larger in the long run than in the short run 
D) the interest elasticity of money demand (M1)is close to -1 
E) none of the above

Exam 16: The demand for money

If real GDP is $9,600 billion and nominal money supply is $1,200 billion, then

If the income velocity of money were V = 2, then

If real GDP increased by 3% over the next year, we should expect

The proportion of money held as a safe asset in an investor's portfolio

The Baumol-Tobin square-root formula predicts that if banks levy hefty fees for withdrawals made from savings accounts, then

Which of the following is NOT an example of a precautionary money balance?

A disadvantage of holding money rather than bonds is that bonds

If restrictive fiscal policy is combined with expansionary monetary policy to reduce interest rates without changing income, then

Which of the following functions does money NOT serve very well?

If the income elasticity of demand for M2 is close to +1, then

If real GDP has grown at a rate of 3%, but nominal money supply and the price level have both grown by 5%, then the income velocity of money must have

Any item can function as a medium of exchange

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

Assume nominal money supply grows by 6% and real GDP grows by 4%.We can conclude that the rate of inflation is about

The precautionary demand for money will increase with

Which of the following assumptions is not part of the quantity theory of money?

The speculative demand for money

In which of the following cases would the owner of a delicatessen hold more precautionary money balances?

According to the Baumol-Tobin square-root formula, money demand for transactions

Empirical studies done on money demand established that

Introduction

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