Exam 22: Quantity Theory, Inflation, and the Demand for Money

If people expect nominal interest rates to be higher in the future, the expected return to bonds ________, and the demand for money ________.

Starting in 1974, the conventional M1 money demand function began to

The equation of exchange states that the quantity of money multiplied by the number of times this money is spent in a given year must equal

Researchers at the Federal Reserve found that M2 money demand functions performed ________ in the 1980s, with M2 velocity moving ________ with the opportunity cost of holding M2.

For the classical economists, the quantity theory of money provided an explanation of movements in the price level. Changes in the price level result

________ quantity theory of money suggests that the demand for money is purely a function of income, and interest rates have no effect on the demand for money.

If the government finances its spending by selling bonds to the central bank, the monetary base will ________ and the money supply will ________.

If people expect nominal interest rates to be lower in the future, the expected return to bonds ________, and the demand for money ________.

Of the three motives for holding money suggested by Keynes, which did he believe to be the most sensitive to interest rates?

Keynes's liquidity preference theory indicates that the demand for money is

In the Baumol-Tobin model, given that total costs for an individual equals + , where T₀ = monthly income, b = brokerage costs, and C = amount raised from each bond transaction, derive the so-called square root rule.

If nominal GDP is $10 trillion, and the money supply is $2 trillion, velocity is

Keynes hypothesized that the transactions component of money demand was primarily determined by the level of

The speculative demand for money may not exist because

The equation of exchange is

If initially the money supply is $2 trillion, velocity is 5, the price level is 2, and real GDP is $5 trillion, a fall in the money supply to $1 trillion

In the late 1990s, M2 velocity ________, suggesting a ________ normal relationship between M2 and macroeconomic variables.

The reason that economists are so interested in the stability of velocity is because if the demand for money is not stable, then steady growth of the money supply

According to the quantity theory of money demand,

The classical economists' conclusion that nominal income is determined by movements in the money supply rested on their belief that ________ could be treated as ________ in the short run.