Deck 16: The demand for money

Question 1

Any item can function 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

Answer 1

as long as the item is generally accepted in trade for most goods and services and for repayment of debt

Question 2

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

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E)an extra $100 in cash withdrawn from your savings account before you take a trip to visit a sick aunt, just in case you find a garage sale along the way

Answer 2

currency in a cash register at a department store

Question 3

From the Baumol-Tobin transaction demand model, we can derive that the

A)the interest elasticity of money demand is -1
B)income elasticity of money demand is +1
C)the interest elasticity of money demand is -1/2
D)income elasticity of money demand is +1/2
E)both C and D

Answer 3

both C and D

Question 4

The proportion of money held as a safe asset in an investor's 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 liquidity of an asset is determined by

A)the central bank
B)the cost of keeping it in a safe place
C)its potential value to the buyer
D)the cost, convenience, and speed with which it can be converted into money
E)how frequently it turns over in trade during the year

Question 6

Deposits in passbook savings accounts at an S&L are

A)not counted as money since they are not held at commercial banks
B)included in M1 but not in M2
C)included in M1 and in M2
D)not included in M1 but included in M2
E)not included in M1 or M2, since they are not demand deposits

Question 7

The Baumol-Tobin square-root formula predicts that the amount of money balances held should

A)move in the opposite direction from the interest rate
B)move in the same direction as the interest rate
C)increase more than proportionally to increases in the cost of money transactions
D)increase less than proportionally to increases in the level of income
E)both A and D

Question 8

The monetary aggregate M2 is defined as

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

Question 9

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

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 10

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

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 11

An asset (other than money) is considered to be more liquid if

A)it has a longer maturity
B)it is issued by a major company rather than the government
C)it earns a high rate of interest or dividend
D)it has more than one use
E)it can be quickly and cheaply transferred into money

Question 12

People who expect a very high inflation rate may

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

Question 13

The precautionary demand for money will increase with

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 14

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

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 15

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

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 16

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

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 17

Money market deposit accounts (MMDAs)

A)are included in M1 since they have check writing privileges
B)are included in M1 since they are bank deposits and federally insured
C)are not included in M1 since they put a limit on the number of checks that can be written
D)are not included in M1 since they are not insured by the FDIC
E)are not included in M1 since they are held at brokerage houses

Question 18

Which of the following affected the demand for M2?

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 19

According to the Baumol-Tobin transaction demand model, the amount of money balances held should increase as

A)the interest rate increases
B)the level of income decreases
C)the cost of money transactions increases
D)the cost of illiquidity increases
E)none of the above

Question 20

A disadvantage of holding money rather than bonds is that bonds

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 21

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

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 22

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

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 23

If the government implements a restrictive fiscal policy, then

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

Question 24

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

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 25

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

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

Question 26

The speculative demand for money

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 27

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

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 28

The demand for money for precautionary reasons

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 29

If interest rates are currently very high and you expect them to go down soon, you will most likely

A) sell your bonds now, while their yield is high and they are more marketable
B) want to hold more money now to undertake more transactions since you expect economic activity to increase
C) hold more money now, so you can buy more bonds later as soon as interest rates have dropped
D) hold on to your bonds for now but expect to sell some of them later once interest rates have declined
E) switch from holding long-term bonds to holding short-term bonds

Question 30

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

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 31

Assume the economy goes into a recession.We should expect that

A)the income velocity of money will decrease
B)the income velocity of money will increase
C)the income velocity of money will remain unaffected
D)money demand and the income velocity of money will both increase
E)money demand and the income velocity of money will both decrease

Question 32

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

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 33

Empirical studies done on money demand established that

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

Question 34

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

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 35

Assume that interest rates drop and GDP increases as a result of expansionary monetary policy.What should happen to the demand for real money balances?

A)it should increase
B)it should decrease since interest rates will decrease
C)it will remain unaffected since income will go up but the interest rate will go down
D)it will remain unaffected since the income velocity of money does not change
E)we can't tell for sure since we do not know what will happen to the income velocity of money

Question 36

Empirical studies done on money demand established that

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 37

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

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 38

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

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 39

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

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 40

Money illusion occurs

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 41

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

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 42

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

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 43

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

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 44

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

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 45

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

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

Question 46

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

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 47

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?

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

Question 48

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

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 49

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

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 50

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

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