BT 440 Quiz 6

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.

a

Everything else held constant, if a central bank makes an unsterilized ________ of foreign assets, then the domestic money supply will ________ and the domestic currency will depreciate.A) purchase; increaseB) purchase; decreaseC) sale; increaseD) sale; decrease

a

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.

a

If the United States has a current account deficit with England of $1 million, and the Bank of England sells $1 million worth of pounds in the foreign exchange market, then England ________ $1 million of international reserves and its monetary base ________ by $1 million. A) gains; rises B) gains; falls C) loses; rises D) loses; falls

a

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

a

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

a

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.

a

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

a

The Bretton Woods agreement created the ________, which was given the task of promoting the growth of world trade by setting rules for the maintenance of fixed exchange rates and by making loans to countries that were experiencing balance of payments difficulties. A) IMF B) World Bank C) Central Settlements Bank D) Bank of International Settlements

a

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

a

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

a

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.

a

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%.

a

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.

a

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

a

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.

a

Under a fixed exchange rate regime, if the domestic currency is initially undervalued, that is, above par, the central bank must intervene to sell the ________ currency by purchasing ________ assets. A) domestic; foreign B) domestic; domestic C) foreign; foreign D) foreign; domestic

a

Under the current managed float exchange rate regime; countries with surpluses in their balance of payments frequently do not want to see their currencies appreciate because it makes their goods ________ expensive abroad and foreign goods ________ in their countries. A) more; cheaper B) more; costlier C) less; cheaper D) less; costlier

a

When the central bank allows the purchase or sale of domestic currency to have an effect on the monetary base, it is called A) an unsterilized foreign exchange intervention. B) a sterilized foreign exchange intervention. C) an exchange rate feedback rule. D) a money neutral foreign exchange intervention.

a

When the domestic currency is initially overvalued in a fixed exchange rate regime, the central bank must intervene in the foreign exchange market to ________ the domestic currency, thereby allowing the money supply to ________. A) purchase; decline B) sell; decline C) purchase; increase D) sell; increase

a

A foreign exchange intervention with an offsetting open market operation that leaves the monetary base unchanged is called A) an unsterilized foreign exchange intervention. B) a sterilized foreign exchange intervention. C) an exchange rate feedback rule. D) a money neutral foreign exchange intervention.

b

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.

b

Countries with surpluses in their balance of payments frequently do not want to see their currencies ________ because it makes their goods ________ expensive abroad. A) appreciate; less B) appreciate; more C) depreciate; less D) depreciate; more

b

Everything else held constant, if a central bank makes an unsterilized purchase of foreign assets, then the domestic money supply will ________ and the domestic currency will ________. A) increase; appreciate B) increase; depreciate C) decrease; appreciate D) decrease; depreciate

b

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

b

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

b

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.

b

The World Bank is an international organization that A) promotes the growth of trade by setting rules for how tariffs and quotas are set by countries. B) makes loans to countries to finance projects such as dams and roads. C) makes loans to countries with balance of payment difficulties. D) helps developing countries that have been having difficulties in repaying their loans to come to terms with lenders in the West.

b

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.

b

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.

b

Under the Bretton Woods system, when a country adopted an expansionary monetary policy, thereby causing a balance of payments ________, the country would eventually be forced to implement ________ monetary policy. A) deficit; expansionary B) deficit; contractionary C) surplus; expansionary D) surplus; contractionary

b

Under the current managed float exchange rate regime, countries with balance of payments ________ frequently do not want to see their currencies ________ because it makes foreign goods more expensive for domestic consumers and can stimulate inflation. A) surpluses; depreciate B) deficits; depreciate C) surpluses; appreciate D) deficits; appreciate

b

________ 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

b

A central bank ________ of domestic currency and corresponding ________ of foreign assets in the foreign exchange market leads to an equal decline in its international reserves and the monetary base, everything else held constant. A) sale; purchase B) sale; sale C) purchase; sale D) purchase; purchase

c

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.

c

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.

c

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.

c

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.

c

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.

c

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.

c

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

c

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

c

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.

c

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.

c

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

c

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.

c

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.

c

To keep from running out of international reserves under the Bretton Woods system, a country had to implement ________ monetary policy to ________ its currency. A) expansionary; strengthen B) expansionary; weaken C) contractionary; strengthen D) contractionary; weaken

c

Under a fixed exchange rate regime, a central bank that does not want to acquire international reserves to keep its currency from ________ will decide to ________ its currency. A) depreciating; revalue B) depreciating; devalue C) appreciating; revalue D) appreciating; devalue

c

Under the current managed float exchange rate regime, countries with ________ in their balance of payments frequently do not want to see their currencies ________ because it makes their goods more expensive abroad and foreign goods cheaper in their countries. A) surpluses; depreciate B) deficits; depreciate C) surpluses; appreciate D) deficits; appreciate

c

Countries with balance of payments deficits do not want to see their currencies ________ because it makes foreign goods ________ expensive for domestic consumers. A) appreciate; less B) appreciate; more C) depreciate; less D) depreciate; more

d

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.

d

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.

d

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).

d

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.

d

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.

d

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.

d

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.

d

Under a fixed exchange rate regime, if the domestic currency is initially ________, that is, ________ par, the central bank must intervene to sell the domestic currency by purchasing foreign assets. A) overvalued; below B) overvalued; above C) undervalued; below D) undervalued; above

d

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

d