Deck 13: Money and Financial Markets

Question 1

As an individual, you cannot participate in the financial markets to issue new stock or sell new bonds because

A) it is too costly for individual savers to research your credit worthiness.
B) you have a bad reputation.
C) your good reputation is insufficient to convince savers.
D) your bank has foreclosed on your automobile loan.

Answer 1

it is too costly for individual savers to research your credit worthiness.

Question 2

In the long run, a 1% increase in real GDP tends to

A) cause a 1% increase in the demand for money.
B) cause a less than 1% increase in the demand for money.
C) cause a greater than 1% increase in the demand for money.
D) have virtually no effect on the demand for money, because the interest rate is the main determinant of the demand for money.

Answer 2

cause a less than 1% increase in the demand for money.

Question 3

The decline in the transaction demand for money in the mid- and late 1970s

A) was accompanied by a fall in velocity.
B) was predicted by most economists.
C) may be partly explained by the development of money-market funds and other financial innovations.
D) was the result of the Federal Reserve's easy-money policy.

Answer 3

may be partly explained by the development of money-market funds and other financial innovations.

Question 4

Tobin's generalized portfolio approach to the demand for money is based on the assumption that

A) money is needed for transactions.
B) all interest-bearing assets are risky.
C) the levels of risk and return vary among assets.
D) variations in wealth have little effect on asset demands.

Question 5

According to Gordon, fiscal policy "is severely flawed as a means of controlling the economy over the short run" because of

A) the long time required for Congressional debate.
B) the effects of temporary tax policy changes are small.
C) the effects of temporary tax policy changes are unpredictable.
D) All of the above.

Question 6

A major criticism of Keynes' original theory of the demand for money is that

A) he made the transaction demand a real demand for money.
B) he combined separate parts of the demand for money.
C) he made the demand for money depend on both the interest rate and the level of income.
D) he assumed the demand for money was directly related to income.

Question 7

Given the quantity theory of money demand, a doubling of the money supply will lead to a

A) halving of the velocity of money.
B) doubling of the level of real output.
C) doubling of the level of nominal output.
D) rise in the level of interest rates.

Question 8

If interest rates are falling, then, ceteris paribus,

A) bond holders are suffering capital losses.
B) bond prices are rising.
C) the liquidity demand for money will be falling.
D) income must be rising.

Question 9

A policy of maintaining a fixed interest rate will have the greatest stabilizing effect on output when money demand is

A) stable.
B) unstable and commodity demand is unstable.
C) stable and commodity demand is unstable.
D) unstable and commodity demand is stable.

Question 10

A fixed money-supply rule will have the greatest stabilizing effect on output when

A) money demand is unstable and commodity demand is stable.
B) both money and commodity demand are unstable.
C) both money demand and commodity demand are stable.
D) the velocity of money is unstable.

Question 11

The quantity equation makes the demand for money depend on

A) the unemployment rate and the level of interest rates.
B) the inflation rate and the unemployment rate.
C) interest rates and the unemployment rate.
D) None of these.

Question 12

Keynes's "speculative motive" for holding money

A) was based on the behavior of speculators who make gains by switching their asset holdings between bonds and common stocks.
B) assumed that as the interest rate rose speculators would move form bonds to money.
C) assumed that as the interest rate fell speculators would move from money to bonds.
D) assumed that there was some "normal" interest rate to which the market would return.

Question 13

An important distinction between Friedman's and others' views of the demand for money is the former's emphasis on the

A) substitution between money and virtually all other goods and assets.
B) nominal rate of interest.
C) substitution between money and other financial assets.
D) effects of wealth.

Question 14

Keynes' speculative demand for money arises because

A) individuals are continually trying to maximize their wealth and income.
B) money is necessary to finance transactions.
C) there are costs to switching between money and interest-earning assets.
D) capital gains on bonds held can be made when interest rates are rising.

Question 15

Keynes's "speculative motive" for holding money

A) was based on the behavior of speculators who make gains by switching their asset holdings between bonds and common stock.
B) assumed that as the interest rate rose speculators would move from bonds to money.
C) assumed that as the interest rate fell speculators would move from money to bonds.
D) None of the above is correct.

Question 16

The issuance of new stocks or bonds are examples of

A) indirect finance.
B) direct finance.
C) financial intermediation.
D) All of the above.

Question 17

Which of the following was not part of the financial deregulation of the 1970s and 1980s?

A) banks could pay interest on checking accounts
B) banks could issue checkbooks for savings accounts
C) institutions other than banks could offer money-market mutual funds, from which checks could be written
D) All of the above were part of the deregulation.

Question 18

The idea that the demand for money is a function of both income and wealth is part of whose theory?

A) Baumol and Friedman
B) the quantity theorists
C) Keynes
D) Tobin

Question 19

According to the "square-root rule" of the transactions demand for money, the demand for money would

A) vary inversely with the interest rate.
B) be zero if there were no costs to switching between money and interest-earning assets.
C) vary less than proportionately with income.
D) All of the above are correct.

Question 20

The quantity theory of money assumed

A) that an increase in prices causes a proportionate increases in real GDP.
B) a fall in the velocity of money causes a proportionate increase in the money supply.
C) a rise in money supply causes a proportionate fall in velocity.
D) the fraction of income people desire to hold in the form of money is a constant.

Question 21

Money market instruments are ________ term and ________ relative to capital market instruments.

A) long; risky
B) short; risky
C) short; less risky
D) long; less risky

Question 22

Which of the following institutions are not examples of financial intermediaries?

A) 1st National Bank, Chemical National Bank, Chase Manhattan National Bank
B) Farmer's Credit Union, 1st Mortgage Bank, IBM Credit Union
C) a Savings and Loan, New York Savings and Loan, First American Savings and Loan
D) the New York Stock Markets, Chicago and Pacific

Question 23

M1 is a definition of money largely confined to which function(s) of money?

A) unit of account
B) store of value
C) medium of exchange
D) B and C.

Question 24

A share of stock might be included in the definition of the money supply since it serves which of the following functions of money?

A) unit of account and a store of value
B) store of value
C) medium of exchange since it can be easily sold
D) B and C are both correct.

Question 25

If the LM curve is vertical, then

A) there is partial "crowding out" of an increase in government expenditures.
B) the increase in the money supply will have no impact on the level of real GNP.
C) the demand for money is highly sensitive to the interest rate.
D) the velocity of money is constant.

Question 26

A major point of the Baumol-Tobin model of the transactions demand for money is that they show that the

A) demand for money is related to income.
B) velocity of money is constant.
C) fraction of income that people wish to hold in the form of money is constant.
D) interest sensitivity of the demand for money is based on a transactions motive shared by most people.

Question 27

If velocity were constant, as assumed by the pre-Keynesian version of the quantity theory, then a 10% change in the money supply would cause

A) a proportionate change in prices.
B) a proportionate change in output.
C) the sum of proportionate change in P and Y equals 10%.
D) the net difference of proportionate change in P and Y equals 10%.

Question 28

Financial intermediaries will be more likely to loan you the savings of other individuals than an individual because

A) they have specialists who research your credit worthiness.
B) they have contingency funds to cover loan losses.
C) they fund credit agencies to collect loan repayment information.
D) All of the above.

Question 29

If the level of interest rates increases, then the current value and price of a bond paying a fixed interest payment will

A) remain unchanged since its underlying value, the interest payment is fixed.
B) fall since new bonds offer higher rates.
C) rise since new bonds offer higher rates.
D) first rise then fall as bond investors calculate the effects of the change in rates.

Question 30

Given the quantity theory of money 1/V represents

A) the velocity of money.
B) the number of times the average $ changes hands.
C) the proportion of nominal income held as a medium of exchange.
D) PY.

Question 31

The difference between the Baumol-Tobin formulation of the demand for money and the Keynesian-Baumol formulation is that

A) the speculative demand is a function of income.
B) the transaction demand is a function of interest rates as well as income.
C) the transaction demand is a function of wealth.
D) Both B and C are correct.

Question 32

Milton Friedman's theory of the demand for money

A) is similar to Tobin's portfolio approach to the demand for money.
B) includes permanent income as one of the significant variables.
C) includes the yields on competing nonmonetary assets.
D) All of the above.

Question 33

A stable regular relation between income and the money stock as the medium of exchange presumes that

A) no interest is paid on the medium of exchange.
B) as interest rates increase the amount of money held increases.
C) as interest rates increase the amount of the medium of exchange held decreases.
D) A and B.

Question 34

Which of the following is NOT included in M2?

A) savings deposits and money market deposit accounts
B) government savings bonds held by the public
C) money-market deposit accounts and overnight repurchase agreements
D) overnight repurchase agreements and savings deposits

Question 35

As a result of the financial deregulation that allowed banks to issue new types of interest-bearing checking accounts

A) people are less willing to hold M1 at a given interest rate on alternative assets.
B) the demand for money M1 curve became more stable.
C) the demand for money M1 curve became vertical.
D) the demand for money M1 curve will shift to the right.

Question 36

A negotiable large-denomination certificate of deposit is an example of a

A) capital market instrument to finance capital acquisitions.
B) money market instrument to finance inventories and short-term receivables.
C) type of stock held by financial institutions.
D) type of stock held by individuals.

Question 37

Prior to financial deregulation, the store of value and medium of exchange functions of money were maintained separate among asset classes because the regulatory agencies

A) precluded the payment of interest by checking accounts.
B) allowed the payment of interest by checking accounts.
C) specifically prohibited money market stock funds.
D) allowed the payment of interest on passbook savings accounts.

Question 38

When the interest rate is considered higher than normal, the speculative demand for money ________, the transaction demand ________.

A) increases; decreases
B) decreases; increases
C) remains the same; decreases
D) first increases then decreases; remains the same

Question 39

In the Keynesian theory of the demand for money, the transaction demand for money is primarily determined by ________ and the speculative demand by ________.

A) the medium of exchange function and income; store of value function and income
B) the medium of exchange function and interest rates; store of value function and interest rates
C) the medium of exchange function and income; store of value function and interest rates
D) the medium of exchange function and interest rate; store of value function and income

Question 40

M2 is a definition of money largely confined to which function(s) of money?

A) unit of account
B) store of value
C) medium of exchange
D) B and C are both correct.

Question 41

Suppose the proportion of deposits that individuals wish to hold as cash were to rise from 5% to 10%. Then,

A) the money supply will rise because people have more cash.
B) bank deposits will fall by the same amount as if the reserve-holding ratio had risen by 5 percentage points.
C) the supply of high-powered money will rise because cash has risen.
D) the money supply will change by the same amount as if the reserve-holding ratio had risen by 5 percentage points.

Question 42

If the Fed wishes to increase the money supply it can

A) increase reserve requirements.
B) sell securities to banks and/or the public.
C) increase the rediscount rate.
D) none of the above is correct.

Question 43

Suppose an individual sells $500 worth of securities to the Fed and puts the proceeds of this sale under his mattress. Then,

A) the money supply will be unaffected.
B) the money supply will rise by $500.
C) the supply of high-powered money will rise by $500 but nothing will happen to the money supply.
D) demand deposits will rise by some multiple of $500, depending on the bank reserve-holding ratio.

Question 44

If the amount of high-powered money were 100 and the bank reserve holding ratio was 0.25 then the maximum stock of money would be (assume that citizens prefer to keep 10% of their money)

A) 100/0.25 which is 400.
B) (100)(1.35) which is 540 0.25.
C) (100)(1.1) which is approximately 314 0.35.
D) (100)(1.35) which is approximately 386 0.35.

Question 45

The supply of high-powered money is $100,000 and the money supply is $500,000. If every individual wishes to hold 5% of his or her deposits in the form of cash, then the bank reserve-holding ratio must be

A) 0.25 if banks have made all loans acceptable by the Federal Reserve requirements.
B) 0.20 if banks have not made all loans acceptable by the Federal Reserve requirements.
C) 0.17 if banks have not made all loans acceptable by the Federal Reserve requirements.
D) 0.16 for any of the legally required reserve amount.

Question 46

The money-creation multiplier is affected by the

A) public's demand for currency as a proportion of demand deposits.
B) bank reserve-holding ratio as a proportion of demand deposits.
C) rediscount rate applied to loans from the Fed to banks.
D) both A and B are correct.

Question 47

Figure 13-1
As a result of financial deregulation

A) the IS curve became flatter and the LM curve became steeper, with the result that the interest rate became more volatile.
B) the IS curve became steeper and the LM curve became flatter, with the result that the interest rate became more volatile.
C) both the IS curve and the LM curve became steeper, with the result that the interest rate became more volatile.
D) both the IS curve and the LM curve became flatter, with the result that the interest rate became more volatile.

Question 48

Suppose that the interest rate is so low that banks currently refuse to make loans. An increase in the supply of high-powered money will

A) have no effect on the money supply if all the new high-powered money ends up as bank reserves.
B) have no effect on the money supply if all the new high-powered money ends up as cash in the hands of the nonbank public.
C) raise the money supply depending on banks reserve-holding ratio.
D) all of the above are correct.

Question 49

If the amount of high-powered money were 100 and the bank reserve holding ratio was 0.25 then the maximum stock of deposits would be (assuming that all money is deposited in the banking system)

A) 500.
B) 450.
C) 400.
D) 350.

Question 50

Figure 13-1
Money is created through the banking processes of taking deposits and making loans if

A) the banks require individual depositors to hold "reserves."
B) the banks require individual borrowers to hold "reserves."
C) paper deposit receipts are not acceptable means of payment.
D) paper deposit receipts are accepted as a means of payment.

Question 51

It is believed, by many, that the underground economy has grown in the United States in recent years causing c to increase and to be volatile. This event implies that the money multiplier should ________ and that the Fed should have a(n) ________ job in controlling the money supply.

A) increase; easier
B) increase; more difficult
C) decrease; easier
D) decrease; more difficult

Question 52

Figure 13-1
In the figure above, which money demand curve reflects the introduction of interest-bearing checking accounts?

A) L' (Y'0)
B) L(Y0)
C) (M1/P)0
D) (M1/P)1

Question 53

If the amount of high-powered money were 100 and the bank reserve holding ratio was 0.25 then the maximum stock of deposits would be (assume that citizens prefer to keep 10% of their money as cash)

A) 100/0.25 times 1.1 which is 440.
B) 100/0.35 which is approximately 286.
C) 100/0.35 times 1.1 which is approximately 314.
D) 100/0.10 which is 1000.

Question 54

At Christmastime, individuals choose to hold more cash and fewer deposits to facilitate their Christmas shopping. This condition will

A) increase the money supply, for people will be spending more money.
B) have no effect on the money supply because people are just exchanging one form of money (deposits) for another form (cash).
C) reduce the money supply because there will be a drain of reserves out of the banks.
D) reduce the money supply, for all that cash is spent on Christmas presents.

Question 55

The stock of high-powered money in the economy is $80 billion. The bank reserve-holding ratio is 0.12 and the public wishes to hold 10% of its deposits as cash. The level of bank deposits will be

A) $333 billion.
B) $100 billion.
C) $250 billion.
D) $200 billion.

Question 56

The stock of high-powered money in the economy is $80 billion. The bank reserve-holding ratio is 0.12 and the public wishes to hold 10% of its deposits as cash. The money supply will be approximately

A) $363 billion assuming the 80 billion of high-powered money is held by banks.
B) $400 billion assuming the 80 billion of high-powered money is held by the Fed or in bank vaults.
C) $327 billion assuming the 80 billion of high-powered money is not held by the Fed or in bank vaults.
D) $425 billion assuming the 80 billion of high-powered money is held by banks.

Question 57

The money-creation multiplier is the

A) same as the income-determination multiplier.
B) amount by which the money supply would rise with a $1 increase in the supply of high-powered money.
C) amount by which the money supply of high-powered money will increase equilibrium GDP.
D) amount by which a $1 increase in reserves would raise an individual bank's deposit liabilities.

Question 58

High-powered money is

A) total deposits received by banks within the system.
B) reserves held by banks to meet withdrawals.
C) deposits divided by the reserve holding ratio.
D) the reserve holding ratio divided by the level of deposits.

Question 59

Figure 13-1
In the 1979-82 period, the Fed pursued a monetary policy which targeted the growth rate of the money supply. Given the effects of financial deregulation on money demand you would expect, ceteris paribus,

A) stable interest rates.
B) volatile interest rates.
C) a constant interest rate.
D) slow growth in interest rates.

Question 60

The immediate impact when the Federal Reserve buys government securities

A) from banks is that the level of bank reserves will decrease.
B) from government security dealers is that the level of bank reserves and deposits will increase.
C) from government security dealers is that the level of bank reserves will increase and the level of deposits decrease.
D) from banks is that the level of deposits will increase but bank reserves will decline.

Question 61

If the Fed allows the federal funds rate to fall well below the rediscount rate it is likely that the Fed will

A) lower the rediscount rate and increase c, the proportion of demand deposits held as cash.
B) raise the rediscount rate.
C) increase loans to banks.
D) decrease loans to banks.

Question 62

Figure 13-2
In the figure above, suppose that the Fed maintains a constant nominal money supply, commodity prices are fixed, and that commodity demand is unstable ranging from IS0 to IS1. Equilibrium Y would then range from

A) A0 to A1.
B) B0 to B1.
C) C0 to C1.
D) Insufficient information.

Question 63

The major reason tight money fell so heavily on housing in the past was that

A) people didn't like to borrow when interest rates were high.
B) the reserve requirements on deposits at saving and loan institutions were higher than those for commercial banks.
C) the lag effect of tight money on housing was long and variable.
D) there were legal ceilings on the interest rates that saving and loan institutions could pay on their deposits.

Question 64

Figure 13-3
In the figure above, given the unstable demand for money and a stable commodity demand, a stable output level at C would best be promoted by

A) targeting interest rates by the Fed.
B) decreasing taxes.
C) increasing expenditures by the government.
D) decreasing expenditures by the government.

Question 65

During the 1990s, interest rates became ________ volatile than in the 1980s because the Fed used open market operations to ________ shifts in the IS and LM curves.

A) more, reinforce
B) less, offset
C) more, offset
D) less, reinforce

Question 66

When the Fed changes money supply by selling government securities, the interest rate will

A) fall unless the LM curve is horizontal.
B) fall unless the IS curve is vertical.
C) rise if the LM curve is vertical or upward sloping.
D) remain constant if the LM curve is vertical.

Question 67

Suppose that you are the central bank president in a developing country which is predominantly agricultural. During planting season, c the proportion of demand deposits held as cash doubles but you wish to keep the money supply constant. You may decide to

A) reduce e and/or buy securities and/or lower the rediscount rate.
B) increase e and/or buy securities and/or lower the rediscount rate.
C) reduce e and/or sell securities and/or raise the rediscount rate.
D) increase e and/or sell securities and/or raise the rediscount rate.

Question 68

Figure 13-3
If there is instability in the demand for commodities

A) a monetary policy of fixed interest rates will perform better than a policy of holding the real money supply fixed.
B) a countercyclical money-supply policy will cause large swings in interest rates.
C) a fixed money supply policy will perform better than countercyclical changes in money supply.
D) a fixed money supply policy will stabilize interest rates.

Question 69

The Fed attempts to affect the level of borrowed reserves by

A) changing the discount rate.
B) changing legal reserve requirements.
C) open market sales.
D) open market purchases.

Question 70

Figure 13-2
In the figure above, suppose that the Fed maintains a constant interest rate, commodity prices are fixed, and that commodity demand is unstable ranging from IS0 to IS1. Equilibrium real output would then range from

A) A0 to A1.
B) B0 to B1.
C) C0 to C1.
D) Insufficient information.

Question 71

If velocity is constant then targeting the money supply and nominal GDP is

A) effectively an interest rate target.
B) effectively a real GDP target.
C) effectively the same thing.
D) inherently inconsistent.

Question 72

Figure 13-3
In the figure above, suppose that the Fed maintains a fixed real money supply and that commodity demand is also fixed. The range of shifts in the LM curve, LM1 to LM2 lead to

A) an unstable equilibrium output, C to B1.
B) a stable equilibrium output, C.
C) an unstable equilibrium output, B0 to B1.
D) a stable equilibrium output, B0 to B1.

Question 73

When money-demand shifts are the predominant disturbance

A) the interest rate depends on the position of the IS curve.
B) the interest rate will be more volatile with an interest-rate target than with a money-supply target.
C) the interest rate will be more volatile with a GDP target than with a money-supply target.
D) a rigid money-supply target will allow the interest rate to respond to shifts in demand for money.

Question 74

Figure 13-3
When demand for money is unstable,

A) a constant interest-rate policy will be superior to a policy of constant money-supply growth.
B) constant money-supply growth will be superior to a countercyclical monetary policy.
C) procyclical monetary policy would be needed to keep the interest rate constant.
D) Both A and C are correct.

Question 75

If both money demand and commodity demand are unstable, as many activists believe, which type of policy target would most likely lead to a stable economy? (assume no supply-side shocks, and a fixed price level)

A) money supply target
B) real GDP target
C) interest rate target
D) none of the above.

Question 76

When the Fed buys $10 million in T-bills, interest rates will ________ because the LM curve shifts ________.

A) fall; left due to the increase in the demand for money and loans
B) rise; right due to the increase in the supply of money and loans
C) fall; right due to the increase in the supply of money and loans
D) rise; left due to the increase in the supply of money and loans

Question 77

In the mid-1980s, velocity "fell off the rails," growing much slower than its historical trend of 3.4 percent. Had the Fed assumed a constant growth rate of 3.4 percent and maintained a constant growth rate of money supply rather than increasing the growth rate of the money supply as it did

A) nominal GDP would have grown more slowly as would real GDP.
B) nominal and real GDP would have grown more rapidly.
C) nominal GDP would have grown more rapidly faster and GDP would have grown more slowly.
D) real GDP would have grown more rapidly faster and nominal GDP would have grown more slowly.

Question 78

"The rigid link between monetary growth and inflation . . . had been broken." M1 grew faster in the deflationary 1980s than in the inflationary 1970s. Why?

A) the demand for money increased, reducing spending
B) the demand for money decreased, due to financial deregulation
C) the demand for money increased, as did velocity
D) the demand for money decreased and the Fed targeted the money supply

Question 79

Figure 13-2
Figure above illustrates an economy with an unstable commodity demand and two possible Fed policies, a constant real money supply or a constant interest. Which policy target promotes a stable economy best?

A) constant money supply, A0 to A1
B) constant money supply, B0 to B1
C) constant interest rate, A0 to A1
D) constant interest rate, B0 to B1

Question 80

Figure 13-3
In the figure above, suppose that the Fed maintains a fixed real money supply and that commodity demand is also fixed. The range of shifts in the LM curve, LM1 to LM2 can then only be explained by

A) changes in the velocity of money.
B) changes in the price level.
C) changes in the demand for money.
D) A and C.