The Demand for Money
1. 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
Answer: C
2. If the money supply is 600 and nominal income is 3,000, the velocity of money is
A) 5. B) 50. C) 1/5. D) undefined.
Answer: A
3. 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.
Answer: C
3. The Cambridge approach to the demand for money did not rule out the
A) effects of interest rates on the demand for money.
B) effects of wealth on the demand for money.
C) effects of income on the demand for money.
D) effects of any of the above.
Answer: D
4. Velocity, over the business cycle, tends to
A) rise during economic contractions. B) fall during economic expansion.
C) stay constant. D) fall during economic contractions. Answer: D
5. 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 both a function of income and interest rates.
D) is both a function of government spending and income.
Answer: C
6. Keynes's 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
Answer: B
7. 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
Answer: A
8. The Baumol-Tobin analysis suggests that a decrease in the brokerage fee for buying and selling bonds will cause the demand for money to _____ and the demand for bonds to _____.
A) increase; increase B) increase; decrease
C) decrease; decrease D) decrease; increase
Answer: D
9. Friedman's assumption that money and goods are substitutes indicates that
A) changes in the money supply have only indirect effects on aggregate spending.
B) changes in the money supply may have a direct effect on aggregate spending.
C) interest rates have no effect on money demand, implying the velocity is constant.
D) both (b) and (c) of the above are true.
Answer: B
10. Irving Fisher's view that velocity is fairly constant in the short run transforms the equation of
exchange into the
A) Cambridge theory of income determination.
B) quantity theory of money.
C) Keynesian theory of income determination.
D) monetary theory of income determination.
Answer: B
11. In the 20th century, velocity
A) has been quite stable over periods as long as a decade.
B) has grown at a constant rate.
C) has been quite volatile.
D) both (a) and (b) of the above.
Answer: C
12. 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 Answer: C
13. In the Baumol-Tobin analysis, the transactions demand for money is
A) negatively related to the level of income.
B) negatively related to the level of interest rates.
C) positively related to the expected return on other assets.
D) only (a) and (b) of the above.
14. In the Baumol-Tobin analysis, the transactions demand for money is
A) negatively related to the level of interest rates.
B) negatively related to the expected return on other assets.
C) positively related to the expected return on other assets.
D) only (a) and (b) of the above.
Answer: D
15. The Baumol-Tobin analysis suggests that an increase in the brokerage fee for buying and
selling bonds will cause the demand for money to ________ and the demand for bonds to ________.
A) increase; increase B) increase; decrease
C) decrease; increase D) decrease; decrease
Answer: B
16. If interest rates do not affect the demand for money, then velocity is _____ likely to be _____.
A) more; stable B) more; unstable C) more; procyclical D) less; stable Answer: A
