Question 1

In the Baumol-Tobin analysis of the demand for money, either an increase in ________ or an increase in ________ increases money demand.

Accepted Answer

A)  income; interest rates 
B)  brokerage fees; interest rates 
C)  interest rates; the price level 
D)  brokerage fees; income 
A)  income; interest rates 
B)  brokerage fees; interest rates 
C)  interest rates; the price level 
D)  brokerage fees; income

Question 2

Only when budget deficits are financed by money creation does the increased government spending lead to ________ in the ________.

Accepted Answer

A)  a decrease; monetary base 
B)  an increase; monetary base 
C)  a decrease; money multiplier 
D)  an increase; money multiplier 
A)  a decrease; monetary base 
B)  an increase; monetary base 
C)  a decrease; money multiplier 
D)  an increase; money multiplier

Question 3

What factors determine the demand for money in the Baumol-Tobin analysis of transactions demand for money? How does a change in each factor affect the quantity of money demanded?

Accepted Answer

The factors are real income, the price l

Question 4

Describe what the liquidity trap is.Explain how it can be problematic for monetary policymakers.

Accepted Answer

The liquidity trap describes the situati

Question 5

In the liquidity trap a small change in interest rates produces ________ change in the quantity of money demanded.

Accepted Answer

A)  a small 
B)  no 
C)  a proportionate 
D)  a very large 
A)  a small 
B)  no 
C)  a proportionate 
D)  a very large

Question 6

Empirical evidence shows that the quantity theory of money is a good theory of inflation

Accepted Answer

A)  in the long run, but not in the short run. 
B)  in the short run, but not in the longrun. 
C)  in both the long run and the short run. 
D)  not in either the long run nor the short run. 
A)  in the long run, but not in the short run. 
B)  in the short run, but not in the longrun. 
C)  in both the long run and the short run. 
D)  not in either the long run nor the short run.

Question 7

In one of the earliest studies on the link between interest rates and money demand using United States data, James Tobin concluded that the demand for money is

Accepted Answer

A)  sensitive to interest rates. 
B)  not sensitive to interest rates. 
C)  not sensitive to changes in income. 
D)  not sensitive to changes in bond values. 
A)  sensitive to interest rates. 
B)  not sensitive to interest rates. 
C)  not sensitive to changes in income. 
D)  not sensitive to changes in bond values.

Question 8

If the money supply is $500 and nominal income is $4,000, the velocity of money is

Accepted Answer

A)  1/20. 
B)  1/8. 
C)  8. 
D)  20. 
A)  1/20. 
B)  1/8. 
C)  8. 
D)  20.

Question 9

Keynes argued that when interest rates were high relative to some normal value, people would expect bond prices to ________, so the quantity of money demanded would ________.

Accepted Answer

A)  increase; increase 
B)  increase; decrease 
C)  decrease; decrease 
D)  decrease; increase 
A)  increase; increase 
B)  increase; decrease 
C)  decrease; decrease 
D)  decrease; increase

Question 10

According to Keynes's theory of liquidity preference, velocity increases when

Accepted Answer

A)  income increases. 
B)  wealth increases. 
C)  brokerage commissions increase. 
D)  interest rates increase. 
A)  income increases. 
B)  wealth increases. 
C)  brokerage commissions increase. 
D)  interest rates increase.

Question 11

The Keynesian theory of money demand predicts that people will increase their money holdings if they believe that

Accepted Answer

A)  interest rates are about to fall. 
B)  bond prices are about to rise. 
C)  expected inflation is about to fall. 
D)  bond prices are about to fall. 
A)  interest rates are about to fall. 
B)  bond prices are about to rise. 
C)  expected inflation is about to fall. 
D)  bond prices are about to fall.

Question 12

Keynes argued that the transactions component of the demand for money was primarily determined by the level of people's ________, which he believed were proportional to ________.

Accepted Answer

A)  transactions; income 
B)  transactions; age 
C)  incomes; wealth 
D)  incomes; age 
A)  transactions; income 
B)  transactions; age 
C)  incomes; wealth 
D)  incomes; age

Question 13

Keynes argued that the precautionary component of the demand for money was primarily determined by the level of people's ________, which he believed were proportional to ________.

Accepted Answer

A)  incomes; wealth 
B)  incomes; age 
C)  transactions; income 
D)  transactions; age 
A)  incomes; wealth 
B)  incomes; age 
C)  transactions; income 
D)  transactions; age

Question 14

If the deficit is financed by selling bonds to the ________, the money supply will ________, causing aggregate demand to ________.

Accepted Answer

A)  public; rise; increase 
B)  public; fall; decrease 
C)  central bank; rise; increase 
D)  central bank; fall; decrease 
A)  public; rise; increase 
B)  public; fall; decrease 
C)  central bank; rise; increase 
D)  central bank; fall; decrease

Question 15

If the money supply is $2 trillion and velocity is 5, then nominal GDP is

Accepted Answer

A)  $1 trillion. 
B)  $2 trillion. 
C)  $5 trillion. 
D)  $10 trillion. 
A)  $1 trillion. 
B)  $2 trillion. 
C)  $5 trillion. 
D)  $10 trillion.

Question 16

The classical economists believed that if the quantity of money doubled,

Accepted Answer

A)  output would double. 
B)  prices would fall. 
C)  prices would double. 
D)  prices would remain constant. 
A)  output would double. 
B)  prices would fall. 
C)  prices would double. 
D)  prices would remain constant.

Question 17

Keynes's model of the demand for money suggests that velocity is ________ related to ________.

Accepted Answer

A)  positively; interest rates 
B)  negatively; interest rates 
C)  positively; bond values 
D)  positively; stock prices 
A)  positively; interest rates 
B)  negatively; interest rates 
C)  positively; bond values 
D)  positively; stock prices

Question 18

Financing government spending with taxes

Accepted Answer

A)  causes both reserves and the monetary base to rise. 
B)  causes both reserves and the monetary base to decline. 
C)  causes reserves to rise, but the monetary base to decline. 
D)  has no net effect on the monetary base. 
A)  causes both reserves and the monetary base to rise. 
B)  causes both reserves and the monetary base to decline. 
C)  causes reserves to rise, but the monetary base to decline. 
D)  has no net effect on the monetary base.

Question 19

The portfolio theories of money demand state that the demand for real money balances is ________ related to income and ________ related to the nominal interest rate.

Accepted Answer

A)  positively; negatively 
B)  positively; positively 
C)  negatively; negatively 
D)  negatively; positively 
A)  positively; negatively 
B)  positively; positively 
C)  negatively; negatively 
D)  negatively; positively

Question 20

Comparing Tobin's model of the speculative demand for money with Keynesian speculative demand

Accepted Answer

A)  both models imply that individuals hold only money or only bonds. 
B)  the Keynesian model implies individuals diversify their asset holdings, while the Tobin model predicts that individuals hold only money or only bonds. 
C)  the Tobin model implies individuals diversify their asset holdings, while the Keynesian model predicts that individuals hold only money or only bonds. 
D)  both models imply that individuals diversify their asset holdings. 
A)  both models imply that individuals hold only money or only bonds. 
B)  the Keynesian model implies individuals diversify their asset holdings, while the Tobin model predicts that individuals hold only money or only bonds. 
C)  the Tobin model implies individuals diversify their asset holdings, while the Keynesian model predicts that individuals hold only money or only bonds. 
D)  both models imply that individuals diversify their asset holdings.

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

In the Baumol-Tobin analysis of the demand for money, either an increase in ________ or an increase in ________ increases money demand.

Only when budget deficits are financed by money creation does the increased government spending lead to ________ in the ________.

What factors determine the demand for money in the Baumol-Tobin analysis of transactions demand for money? How does a change in each factor affect the quantity of money demanded?

Describe what the liquidity trap is.Explain how it can be problematic for monetary policymakers.

In the liquidity trap a small change in interest rates produces ________ change in the quantity of money demanded.

Empirical evidence shows that the quantity theory of money is a good theory of inflation

In one of the earliest studies on the link between interest rates and money demand using United States data, James Tobin concluded that the demand for money is

If the money supply is $500 and nominal income is $4,000, the velocity of money is

Keynes argued that when interest rates were high relative to some normal value, people would expect bond prices to ________, so the quantity of money demanded would ________.

According to Keynes's theory of liquidity preference, velocity increases when

The Keynesian theory of money demand predicts that people will increase their money holdings if they believe that

Keynes argued that the transactions component of the demand for money was primarily determined by the level of people's ________, which he believed were proportional to ________.

Keynes argued that the precautionary component of the demand for money was primarily determined by the level of people's ________, which he believed were proportional to ________.

If the deficit is financed by selling bonds to the ________, the money supply will ________, causing aggregate demand to ________.

If the money supply is $2 trillion and velocity is 5, then nominal GDP is

The classical economists believed that if the quantity of money doubled,

Keynes's model of the demand for money suggests that velocity is ________ related to ________.

Financing government spending with taxes

The portfolio theories of money demand state that the demand for real money balances is ________ related to income and ________ related to the nominal interest rate.

Comparing Tobin's model of the speculative demand for money with Keynesian speculative demand

Why Study Money, Banking, and Financial Markets

An Overview of the Financial System

What Is Money

Understanding Interest Rates

The Behavior of Interest Rates

The Risk and Term Structure of Interest Rates

The Stock Market, the Theory of Rational Expectations, and the Efficient Market Hypothesis

An Economic Analysis of Financial Structure

Financial Crises

Banking and the Management of Financial Institutions

Economic Analysis of Financial Regulation

Banking Industry: Structure and Competition

Nonbank Finance

Financial Derivatives

Conflicts of Interest in the Financial Industry

Central Banks and the Federal Reserve System

The Money Supply Process

Tools of Monetary Policy

The Conduct of Monetary Policy: Strategy and Tactics

The Foreign Exchange Market

The International Financial System

Aggregate Demand and Supply Analysis

Monetary Policy Theory

Transmission Mechanisms of Monetary Policy

Filters

In the Baumol-Tobin analysis of the demand for money, either an increase in or an increase in increases money demand.

Only when budget deficits are financed by money creation does the increased government spending lead to in the .

Keynes argued that when interest rates were high relative to some normal value, people would expect bond prices to , so the quantity of money demanded would .

Keynes argued that the transactions component of the demand for money was primarily determined by the level of people's , which he believed were proportional to .

Keynes argued that the precautionary component of the demand for money was primarily determined by the level of people's , which he believed were proportional to .

If the deficit is financed by selling bonds to the , the money supply will , causing aggregate demand to .

Keynes's model of the demand for money suggests that velocity is related to .

The portfolio theories of money demand state that the demand for real money balances is related to income and related to the nominal interest rate.