Q&A Hero

Q: 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 ________. A. rise; higher B. rise; lower C. fall; higher D. fall; lower

Q: 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. A. positively; negatively B. positively; positively C. negatively; negatively D. negatively; positively

Q: Explain the Keynesian theory of money demand. What motives did Keynes think determined money demand? What are the two reasons why Keynes thought velocity could NOT be treated as a constant?

Q: The Keynesian demand for real balances can be expressed as A. Md = f(i,Y). B. Md/P = f(i). C. Md/P = f(Y). D. Md/P = f(i,Y).

Q: Keynes's liquidity preference theory indicates that the demand for money is ________ related to ________. A. negatively; interest rates B. positively; interest rates C. negatively; income D. negatively; wealth

Q: Keynes's model of the demand for money suggests that velocity is ________ related to ________. A. positively; interest rates B. negatively; interest rates C. positively; bond values D. positively; stock prices

Q: Keynes's liquidity preference theory indicates that the demand for money is A. constant. B. positively related to interest rates. C. negatively related to interest rates. D. negatively related to bond values.

Q: Keynes's model of the demand for money suggests that velocity is A. constant. B. positively related to interest rates. C. negatively related to interest rates. D. positively related to bond values.

Q: Keynes's theory of the demand for money is consistent with ________ movements in ________. A. countercyclical; velocity B. procyclical; velocity C. countercyclical; expectations D. procyclical; expectations

Q: Keynes's theory of the demand for money is consistent with A. countercyclical movements in velocity. B. a constant velocity. C. procyclical movements in velocity. D. a relatively stable velocity.

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

Q: Because interest rates have substantial fluctuations, the ________ theory of the demand for money indicates that velocity has substantial fluctuations as well. A. classical B. Cambridge C. liquidity preference D. Pigouvian

Q: Keynes's theory of the demand for money implies that velocity is A. not constant but fluctuates with movements in interest rates. B. not constant but fluctuates with movements in the price level. C. not constant but fluctuates with movements in the time of year. D. a constant.

Q: 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 ________. A. increase; increase B. increase; decrease C. decrease; decrease D. decrease; increase

Q: According to Keynes's theory of liquidity preference, velocity increases when A. income increases. B. wealth increases. C. brokerage commissions increase. D. interest rates increase.

Q: Keynes argued that when interest rates were low relative to some normal value, people would expect bond prices to ________ so the quantity of money demanded would ________. A. increase; increase B. increase; decrease C. decrease; increase D. decrease; decrease

Q: If people expect nominal interest rates to be lower in the future, the expected return to bonds ________, and the demand for money ________. A. increases; increases B. increases; decreases C. decreases; increases D. decreases; decreases

Q: If people expect nominal interest rates to be higher in the future, the expected return to bonds ________, and the demand for money ________. A. rises; increases B. rises; decreases C. falls; increases D. falls; decreases

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

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

Q: Of the three motives for holding money suggested by Keynes, which did he believe to be the most sensitive to interest rates? A. the transactions motive B. the precautionary motive C. the speculative motive D. the altruistic motive

Q: The speculative motive for holding money is closely tied to what function of money? A. store of wealth B. unit of account C. medium of exchange D. standard of deferred payment

Q: Keynes hypothesized that the speculative component of money demand was primarily determined by the level of A. interest rates. B. velocity. C. income. D. stock market prices.

Q: The demand for money as a cushion against unexpected contingencies is called the A. transactions motive. B. precautionary motive. C. insurance motive. D. speculative motive.

Q: 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 ________. A. incomes; wealth B. incomes; age C. transactions; income D. transactions; age

Q: Keynes hypothesized that the precautionary component of money demand was primarily determined by the level of A. interest rates. B. velocity. C. income. D. stock market prices.

Q: 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 ________. A. transactions; income B. transactions; age C. incomes; wealth D. incomes; age

Q: Keynes hypothesized that the transactions component of money demand was primarily determined by the level of A. interest rates. B. velocity. C. income. D. stock market prices.

Q: The Keynesian theory of money demand emphasizes the importance of A. a constant velocity. B. irrational behavior on the part of some economic agents. C. interest rates on the demand for money. D. expectations.

Q: If the deficit is financed by selling bonds to the ________, the money supply will ________, causing aggregate demand to ________. A. public; rise; increase B. public; fall; decrease C. central bank; rise; increase D. central bank; fall; decrease

Q: 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. A. public; rise B. public; fall C. central bank; rise D. central bank; fall

Q: Only when budget deficits are financed by money creation does the increased government spending lead to ________ in the ________. A. a decrease; monetary base B. an increase; monetary base C. a decrease; money multiplier D. an increase; money multiplier

Q: This method of financing government spending is frequently called printing money because high-powered money (the monetary base) is created in the process. A. financing government spending with taxes B. financing government spending through a Treasury sale of bonds that are then purchased by the Fed C. financing government spending by selling bonds to the public, which pays for the bonds with currency D. financing government spending by selling bonds to the public, which pays for the bonds with checks

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

Q: The financing of government spending by issuing debt 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.

Q: Financing government spending by selling bonds to the public, which pays for the bonds with currency, A. leads to a permanent decline in the monetary base. B. leads to a permanent increase in the monetary base. C. leads to a temporary increase in the monetary base. D. has no net effect on the monetary base.

Q: Financing government spending with taxes 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.

Q: If the government finances its spending by selling bonds to the central bank, the monetary base will ________ and the money supply will ________. A. increase; increase B. increase; decrease C. decrease; decrease D. not change; not change

Q: If the government finances its spending by issuing debt to the public, the monetary base will ________ and the money supply will ________. A. increase; increase B. increase; decrease C. decrease; increase D. not change; not change

Q: Methods of financing government spending are described by an expression called the government budget constraint, which states the following A. DEFICIT = (G - T) = ΔMB + ΔBONDS. B. DEFICIT = (G - T) = ΔMB - ΔBONDS. C. DEFICIT = (G - T) = ΔBONDS - ΔMB. D. DEFICIT = (G - T) = ΔMB/ΔBONDS.

Q: Methods of financing government spending are described by an expression called the government budget constraint, which states the following A. the government budget deficit must equal the sum of the change in the monetary base and the change in government bonds held by the public. B. the government budget deficit must equal the difference between the change in the monetary base and the change in government bonds held by the public. C. the government budget deficit must equal the difference between the change in the monetary base and the change in government bonds held by the Fed. D. the government budget deficit must equal the difference between the change in the monetary base and the change in government bonds held by the Treasury.

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

Q: The quantity theory of inflation indicates that if the aggregate output is growing at 3% per year and the growth rate of money is 5%, then inflation is A. 2%. B. 8%. C. -2%. D. 1.6%.

Q: The quantity theory of inflation indicates that the inflation rate equals A. the growth rate of the money supply minus the growth rate of aggregate output. B. the level of the money supply minus the level of aggregate output. C. the growth rate of the money supply plus the growth rate of aggregate output. D. the level of the money supply plus the level of aggregate output.

Q: Irving Fisher's view that velocity is fairly constant in the short run transforms the equation of exchange into the A. Friedman's theory of income determination. B. quantity theory of money. C. Keynesian theory of income determination. D. monetary theory of income determination.

Q: ________ 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. A. Keynes's B. Fisher's C. Friedman's D. Tobin's

Q: Fisher's quantity theory of money suggests that the demand for money is purely a function of ________, and ________ no effect on the demand for money. A. income; interest rates have B. interest rates; income has C. government spending; interest rates have D. expectations; income has

Q: According to the quantity theory of money demand A. an increase in interest rates will cause the demand for money to fall. B. a decrease in interest rates will cause the demand for money to increase. C. interest rates have no effect on the demand for money. D. an increase in money will cause the demand for money to fall.

Q: 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 A. reduces real GDP to $2.5 trillion. B. causes velocity to rise to 10. C. decreases the price level to 1. D. decreases the price level to 1 and decreases velocity to 2.5.

Q: If initially the money supply is $1 trillion, velocity is 5, the price level is 1, and real GDP is $5 trillion, an increase in the money supply to $2 trillion A. increases real GDP to $10 trillion. B. causes velocity to fall to 2.5. C. increases the price level to 2. D. increases the price level to 2 and velocity to 10.

Q: For the classical economists, the quantity theory of money provided an explanation of movements in the price level. Changes in the price level result A. from proportional changes in the quantity of money. B. primarily from changes in the quantity of money. C. only partially from changes in the quantity of money. D. from changes in factors other than the quantity of money.

Q: The classical economists' contention that prices double when the money supply doubles is predicated on the belief that in the short run velocity is ________ and real GDP is ________. A. constant; constant B. constant; variable C. variable; variable D. variable; constant

Q: The classical economists believed that if the quantity of money doubled A. output would double. B. prices would fall. C. prices would double. D. prices would remain constant.

Q: Cutting the money supply by one-third is predicted by the quantity theory of money to cause A. a sharp decline in real output of one-third in the short run, and a fall in the price level by one-third in the long run. B. a decline in real output by one-third. C. a decline in output by one-sixth, and a decline in the price level of one-sixth. D. a decline in the price level by one-third.

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

Q: 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. A. velocity; constant B. velocity; variable C. money; constant D. money; variable

Q: In Irving Fisher's quantity theory of money, velocity was determined by A. interest rates. B. real GDP. C. the institutions in an economy that affect individuals' transactions. D. the price level.

Q: Irving Fisher took the view that the institutional features of the economy which affect velocity change ________ over time so that velocity will be fairly ________ in the short run. A. rapidly; erratic B. rapidly; stable C. slowly; stable D. slowly; erratic

Q: The equation of exchange is A. M × P = V × Y. B. M + V = P + Y. C. M + Y = V + P. D. M × V = P × Y.

Q: In the equation of exchange, the concept that provides the link between M and PY is called A. the velocity of money. B. aggregate demand. C. aggregate supply. D. the money multiplier.

Q: 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 A. nominal income. B. real income. C. real gross national product. D. velocity.

Q: The velocity of money is defined as A. real GDP divided by the money supply. B. nominal GDP divided by the money supply. C. real GDP times the money supply. D. nominal GDP times the money supply.

Q: Velocity is defined as A. P + M + Y. B. (P × M)/Y. C. (Y × M)/P. D. (P × Y)/M.

Q: If the money supply is $20 trillion and velocity is 2, then nominal GDP is A. $2 trillion. B. $10 trillion. C. $20 trillion. D. $40 trillion.

Q: If the money supply is $2 trillion and velocity is 5, then nominal GDP is A. $1 trillion. B. $2 trillion. C. $5 trillion. D. $10 trillion.

Q: If nominal GDP is $10 trillion, and velocity is 10, the money supply is A. $1 trillion. B. $5 trillion. C. $10 trillion. D. $100 trillion.

Q: If nominal GDP is $8 trillion, and the money supply is $2 trillion, velocity is A. 0.25. B. 4. C. 8. D. 16.

Q: If nominal GDP is $10 trillion, and the money supply is $2 trillion, velocity is A. 0.2. B. 5. C. 10. D. 20.

Q: If the money supply is $600 and nominal income is $3,600, the velocity of money is A. 1/60. B. 1/6. C. 6. D. 60.

Q: If the money supply is $500 and nominal income is $4,000, the velocity of money is A. 1/20. B. 1/8. C. 8. D. 20.

Q: If the money supply is $600 and nominal income is $3,000, the velocity of money is A. 1/50. B. 1/5. C. 5. D. 50.

Q: If the money supply is $500 and nominal income is $3,000, the velocity of money is A. 1/60. B. 1/6. C. 6. D. 60.

Q: The velocity of money is A. the average number of times that a dollar is spent in buying the total amount of final goods and services. B. the ratio of the money stock to high-powered money. C. the ratio of the money stock to interest rates. D. the average number of times a dollar is spent in buying financial assets.

Q: The average number of times that a dollar is spent in buying the total amount of final goods and services produced during a given time period is known as A. gross national product. B. the spending multiplier. C. the money multiplier. D. velocity.

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

Q: The quantity theory of money is a theory of how A. the money supply is determined. B. interest rates are determined. C. the nominal value of aggregate income is determined. D. the real value of aggregate income is determined.

Q: Explain the 1992 crisis that led to the breakdown of the European Union's Exchange Rate Mechanism. What disadvantages of exchange-rate targeting were exhibited during this crisis?

Q: Explain an additional disadvantage for a country undergoing dollarization compared to a currency board or other exchange-rate targeting regimes.

Q: The monetary policy strategy that directly ties down the price of internationally traded goods is A) exchange-rate targeting. B) monetary targeting. C) inflation targeting. D) the implicit nominal anchor.

Q: The monetary policy strategy that results in the loss of an independent monetary policy is A) exchange-rate targeting. B) monetary targeting. C) inflation targeting. D) the implicit nominal anchor.