Question 1

If nominal GDP is $8 trillion, and the money supply is $2 trillion, velocity is

Accepted Answer

A)  0.25. 
B)  4. 
C)  8. 
D)  16.

Question 2

Keynes's liquidity preference theory indicates that the demand for money is ________ related to ________.

Accepted Answer

A)  negatively; interest rates 
B)  positively; interest rates 
C)  negatively; income 
D)  negatively; wealth

Question 3

In the equation of exchange, the concept that provides the link between M and PY is called

Accepted Answer

A)  the velocity of money. 
B)  aggregate demand. 
C)  aggregate supply. 
D)  the money multiplier.

Question 4

Irving Fisher's view that velocity is fairly constant in the short run transforms the equation of exchange into the

Accepted Answer

A)  Friedman's theory of income determination. 
B)  quantity theory of money. 
C)  Keynesian theory of income determination. 
D)  monetary theory of income determination.

Question 5

The portfolio theories of money demand state that when income (and therefore, wealth) is higher, the demand for the money asset will ________ and the demand for real money balances will be ________.

Accepted Answer

A)  rise; higher 
B)  rise; lower 
C)  fall; higher 
D)  fall; lower

Question 6

The finance of government spending through a Treasury sale of bonds which are then purchased by the Fed

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.

Question 7

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

Accepted Answer

A)  constant. 
B)  positively related to interest rates. 
C)  negatively related to interest rates. 
D)  positively related to bond values.

Question 8

The view that velocity is constant in the short run transforms the equation of exchange into the quantity theory of money. According to the quantity theory of money, when the money supply doubles

Accepted Answer

A)  velocity falls by 50 percent. 
B)  velocity doubles. 
C)  nominal incomes falls by 50 percent. 
D)  nominal income doubles.

Question 9

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

Accepted Answer

A)  income; interest rate 
B)  interest rates; brokerage fees 
C)  brokerage fees; income 
D)  interest rate; income

Question 10

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

Accepted Answer

A)  is purely a function of income, and interest rates have no effect on the demand for money. 
B)  is purely a function of interest rates, and income has no effect on the demand for money. 
C)  is a function of both income and interest rates. 
D)  is a function of both government spending and income.

Question 11

Because the quantity theory of money tells us how much money is held for a given amount of aggregate income, it is also a theory of

Accepted Answer

A)  interest-rate determination. 
B)  the demand for money. 
C)  exchange-rate determination. 
D)  the demand for assets.

Question 12

Because Keynes assumed that the expected return on money was zero, he argued that people would

Accepted Answer

A)  never hold money. 
B)  never hold money as a store of wealth. 
C)  hold money as a store of wealth when the expected return on bonds was negative. 
D)  hold money as a store of wealth only when forced to by government policy.

Question 13

Methods of financing government spending are described by an expression called the government budget constraint, which states the following:

Accepted Answer

A)  DEFICIT = (G - T) = ΔMB + ΔBONDS. 
B)  DEFICIT = (G - T) = ΔMB - ΔBONDS. 
C)  DEFICIT = (G - T) = ΔBONDS - ΔMB. 
D)  DEFICIT = (G - T) = ΔMB/ΔBONDS.

Question 14

If the deficit is financed by selling bonds to the ________, the money supply will ________, increasing aggregate demand, and leading to a rise in the price level.

Accepted Answer

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

Question 15

In a liquidity trap, monetary policy has ________ effect on aggregate spending because a change in the money supply has ________ effect on interest rates.

Accepted Answer

A)  no; no 
B)  no; a large 
C)  no; a small 
D)  a large; a large

Question 16

Starting in 1974, the conventional M1 money demand function began to severely ________ the demand for money. Stephen Goldfeld labeled this phenomenon "the case of the missing ________."

Accepted Answer

A)  underpredict; velocity 
B)  overpredict; velocity 
C)  underpredict; money 
D)  overpredict; money

Question 17

The Keynesian demand for real balances can be expressed as

Accepted Answer

A)  Md = f(i,Y). 
B)  Md/P = f(i). 
C)  Md/P = f(Y). 
D)  Md/P = f(i,Y).

Question 18

In the Baumol-Tobin analysis of transactions demand, scale economies imply that an increase in real income increases the quantity of money demanded ________, while an increase in the price level increases the quantity of money demanded ________.

Accepted Answer

A)  proportionately; less than proportionately 
B)  more than proportionately; proportionately 
C)  less than proportionately; proportionately 
D)  proportionately; more than proportionately

Question 19

The theory of portfolio choice indicates that factors affecting the demand for money include

Accepted Answer

A)  income. 
B)  nominal interest rate. 
C)  liquidity of other assets. 
D)  all the above.

Question 20

Conventional money demand functions tended to ________ money demand in the middle and late 1970s, and ________ velocity beginning in 1982.

Accepted Answer

A)  overpredict; overpredict 
B)  overpredict; underpredict 
C)  underpredict; overpredict 
D)  underpredict; underpredict

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

If nominal GDP is $8 trillion, and the money supply is $2 trillion, velocity is

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

In the equation of exchange, the concept that provides the link between M and PY is called

Irving Fisher's view that velocity is fairly constant in the short run transforms the equation of exchange into the

The portfolio theories of money demand state that when income (and therefore, wealth) is higher, the demand for the money asset will and the demand for real money balances will be .

The finance of government spending through a Treasury sale of bonds which are then purchased by the Fed

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

The view that velocity is constant in the short run transforms the equation of exchange into the quantity theory of money. According to the quantity theory of money, when the money supply doubles

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

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

Because the quantity theory of money tells us how much money is held for a given amount of aggregate income, it is also a theory of

Because Keynes assumed that the expected return on money was zero, he argued that people would

Methods of financing government spending are described by an expression called the government budget constraint, which states the following:

If the deficit is financed by selling bonds to the , the money supply will , increasing aggregate demand, and leading to a rise in the price level.

In a liquidity trap, monetary policy has effect on aggregate spending because a change in the money supply has effect on interest rates.

Starting in 1974, the conventional M1 money demand function began to severely the demand for money. Stephen Goldfeld labeled this phenomenon "the case of the missing ."

The Keynesian demand for real balances can be expressed as

In the Baumol-Tobin analysis of transactions demand, scale economies imply that an increase in real income increases the quantity of money demanded , while an increase in the price level increases the quantity of money demanded .

The theory of portfolio choice indicates that factors affecting the demand for money include

Conventional money demand functions tended to money demand in the middle and late 1970s, and velocity beginning in 1982.