EC 311 Chapter 20

Which of the following would reflect the transactions demand for money? a. Keeping funds in your checking account to pay your rent b. Keeping funds in your savings account because the interest rate looks relatively attractive c. Selling common stocks you own and increasing the money in your savings account because you think stock prices will fall soon d. Buying a U.S. Treasury security using funds from your checking account

a. Keeping funds in your checking account to pay your rent

The velocity of money increases if: a. each unit of money is used more frequently. b. each unit of money is used less frequently. c. more purchases are made. d. none of the above answers is correct; the velocity of money is constant.

a. each unit of money is used more frequently.

When the currency loses value, causing people to spend it more quickly, this: a. has the same effect on inflation as an increase in money growth. b. has the same effect on inflation as a decrease in money growth. c. causes higher inflation but not as much as an increase in money growth would. d. causes even higher inflation than an increase in money growth would.

a. has the same effect on inflation as an increase in money growth.

Economic researchers have found: a. no examples of countries with high rates of money growth and low inflation rates. b. many examples of countries with low rates of money growth and high inflation rates. c.many examples of countries with high rates of money growth and low inflation rates. d. no relationship between rates of money growth and inflation rates.

a. no examples of countries with high rates of money growth and low inflation rates.

The empirical data reveals the velocity of M2 to be: a. relatively stable in the long run. b. highly volatile in the long run. c. stable only when measured annually. d. higher than the velocity of M1.

a. relatively stable in the long run.

Milton Friedman's assertion that "inflation is a monetary phenomenon" is based on: a. the quantity theory of money. b. the assumption of constant nominal GDP growth. c. the assumption that the price level grows at the same rate as real GDP. d. the assumption that the central bank increases the money supply by a constant rate every year.

a. the quantity theory of money.

Equilibrium in the money market would be expressed by which of the following? a. Ms = (1/V)Y b. Ms =Md c.Ms =(1/V)P d. Md =(1/V)P

b. Ms =Md

Inflation can be thought of as: a. an increase in the price of money. b. a decrease in the price of money. c. no change in the price of money, just in the supply of money. d. no change in the price of money, just in the demand for money.

b. a decrease in the price of money.

When nominal interest rates are high, the velocity of money should: a. be low. b. also be high. c. not change; the velocity of money does not vary with the interest rate. d. decrease by the same percent that the nominal interest rate has increased.

b. also be high.

Consider the following ratio: the average annual inflation rate/the average annual money growth rate. A country with a ratio less than one would have: a. an average inflation rate greater than the average rate of money growth. b. an average inflation rate less than the average rate of money growth. c. to have a high unemployment rate. d. an economy suffering from a recession.

b. an average inflation rate less than the average rate of money growth.

If money were valued in terms of how many minutes a person needs to work to buy a dollar, an increase in the number of minutes of work needed would be: a. a decline in the price of money. b. an increase in the price of money. c. no change in the real price of money, just the nominal price increases. d. no change in the real or nominal price of money.

b. an increase in the price of money.

In May of 2003, the European Central Bank (ECB) decided to: a. focus almost exclusively on money growth as their target. b. downgrade the role of money growth in their policymaking strategy. c. limit the role of interest rate targeting to be second in importance to money growth targeting. d. switch from an inflation target to a money growth target.

b. downgrade the role of money growth in their policymaking strategy.

If on average, a dollar is spent 4 times each year to purchase real output, the velocity of money is: a. one-fourth. b. four. c. the money supply divided by 4 d. nominalGDP divided by four.

b. four

Nobel-laureate economist Milton Friedman suggested that policymakers strive to ensure that the monetary aggregates: a. grow at a rate equal to the rate of inflation. b. grow at a rate equal to the rate of real growth plus the desired level of inflation. c.grow at a rate equal to the rate of real growth less the desired level of inflation. d. remain constant in terms of dollar amounts.

b. grow at a rate equal to the rate of real growth plus the desired level of inflation.

If we look at the value of money in terms of how many units of a good it takes to buy one dollar, then inflation means a. it would take more goods to buy the same dollar. b. it would take fewer goods to buy the same dollar. c. the same number of goods would buy fewer dollars. d. it would take fewer dollars to buy the same goods.

b. it would take fewer goods to buy the same dollar

Over the long run if central banks want to avoid high rates of inflation, they need to be concerned with the: a. unemployment rate. b. money growth rate. c. real economic growth rate. d. productivity of labor.

b. money growth rate.

If the equation of exchange is MV = PY the Y represents: a. nominal GDP. b. real GDP. c. potential output. d. economic growth.

b. real GDP.

If the nominal interest rate increases: a. the cost of holding money decreases. b. the cost of holding money increases. c. the velocity of money should decrease. d. the cost of holding money increases and the velocity of money should decrease.

b. the cost of holding money increases.

Key assumptions behind the quantity theory of money include: a. the money supply is fixed. b. the velocity of money is constant. c. the percentage change in the price level equals the percentage change in real GDP. d. the change in nominal GDP is zero.

b. the velocity of money is constant.

Which of the following expresses the equation of exchange? a. MY = PV b. MV = Y c. MV = PY d. MP = VY

c. MV = PY

If we let Md reflect money demand, then we can write the equation for money demand as: a. Md =VY. b. Md = PY. c.Md=(1/V)PY. d. Md =V(Y/P).

c. Md = (1/V) PY.

A rate of inflation that exceeds the growth rate of money for a country could be explained by: a. a growing real economy. b. a constant velocity of money. c. an increasing velocity of money. d. a decreasing velocity of money.

c. an increasing velocity of money.

Based on the analysis of the equation of exchange, Irving Fisher, derived the quantity theory of money which states that: a. velocity changes always offset changes in the supply of money. b. changes in the aggregate price level are caused solely by changes in velocity. c. changes in the aggregate price level are caused solely by changes in the quantity of money. d. none of the answers given is correct.

c. changes in the aggregate price level are caused solely by changes in the quantity of money.

History shows that: a. countries with low rates of money growth have high rates of inflation b. money growth and inflation are not related. c. countries with high rates of money growth have high rates of inflation. d.money growth rates equal inflation rates.

c. countries with high rates of money growth have high rates of inflation.

If real GDP stays the same but the price level increases: a. nominal money demand should remain the same. b. nominal money demand should decrease. c. nominal money demand should increase. d. real money demand should decrease.

c. nominal money demand should increase.

Which of the following statements is most correct? a. The current rate of inflation is the result of money growth. b. Money growth is the result of inflation. c. There is no clear link between high, sustained inflation and the monetary aggregates. d. It is impossible to have high, sustained inflation without monetary accommodation

d. It is impossible to have high, sustained inflation without monetary accommodation.

If we look at the equation for money demand from Irving Fisher, which of the following statements is true? a. Velocity does not play any role in the equation b. Money demand is not a factor of nominal income c. The price level does not impact money demand d. There isn't an explicit role for the interest rate in the equation

d. There isn't an explicit role for the interest rate in the equation

During economic slowdowns (recessions) the velocity of money tends to: a. remain relatively stable. b. increase slightly. c. increase dramatically. d. decrease.

d. decrease.

The velocity of money equals: a. nominal GDP times the price level. b. nominal GDP times the money supply. c. nominal GDP divided by the price level. d. nominal GDP divided by the money supply.

d. nominal GDP divided by the money supply.

In the late 1970s and early 1980s, the velocity of money increased significantly. The main reason(s) for the increase was: a. as presidential election years near the velocity of money increases. b. the introduction of stock and bond mutual funds with draft writing privileges and low nominal interest rates. c. high nominal interest rates. d. the introduction of stock and bond mutual funds with draft writing privileges along with high nominal interest rates.

d. the introduction of stock and bond mutual funds with draft writing privileges along with high nominal interest rates.