Money & Banking
CHAPTER 20
Question 1
Key assumptions behind the quantity theory of money include:
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The money supply is fixed. |
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The velocity of money is constant. |
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The percentage change in the price level equals the percentage change in real GDP. |
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The change in nominal GDP is zero. |
4 points
Question 2
To say that the relationship between the velocity of money and the opportunity cost of holding money is not stable is the same as saying:
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The supply of money is not stable. |
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The money market is always in disequilibrium. |
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Money demand is stable. |
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Money demand is not stable. |
4 points
Question 3
During economic slowdowns (recessions) the velocity of money tends to:
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Remain relatively stable. |
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Increase slightly. |
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Increase dramatically. |
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Decrease. |
4 points
Question 4
If real GDP stays the same but the price level increases:
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Nominal money demand should remain the same. |
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Nominal money demand should decrease. |
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Nominal money demand should increase. |
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Real money demand should decrease. |
4 points
Question 5
The demand for money varies:
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Directly with the liquidity of other financial assets. |
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Inversely with the liquidity of other financial assets. |
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Not all with the liquidity of other assets since money is liquid. |
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Inversely with wealth. |
4 points
Question 6
If your monthly income is $2000 and you receive it at the beginning of each month and spend equal amounts each day to where on the last day of the month your balance is $0; your average money holdings each month are:
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$2000. |
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$66.67. |
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$1000. |
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$800.00. |
4 points
Question 7
Which of the following statements best completes the sentence, “All other factors constant, as the nominal interest rate increases, ….”?
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The opportunity cost of money decreases, the velocity of money decreases, and the quantity of money people want to hold decreases. |
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The opportunity cost of money increases, the velocity of money decreases, and the quantity of money people want to hold decreases. |
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The opportunity cost of money decreases, the velocity of money increases, and the quantity of money people want to hold decreases. |
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The opportunity cost of money increases, the velocity of money increases, and the quantity of money people want to hold decreases. |
4 points
Question 8
If M = the money supply; Y = real output, P = the price level, and V = velocity, which of the following equals the income velocity of money?
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(Y·M)/P |
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(P·M)/Y |
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(P·Y)/M |
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(P·Y) +M. |
4 points
Question 9
If on average, a dollar is spent 4 times each year to purchase goods and services, the velocity of money is:
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One-fourth. |
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Four. |
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The money supply divided by 4 |
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Nominal GDP divided by four. |
4 points
Question 10
Which of the following would reflect the transaction demand for money?
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Keeping funds in your checking account to pay your rent. |
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Keeping funds in your savings account because the interest rate looks relatively attractive. |
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Selling common stocks you own and increasing the money in your savings account because you think stock prices will fall soon. |
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a and c. |
4 points
Question 11
The wide use of credit cards should have its greatest impact on reducing:
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The portfolio demand for money. |
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The precautionary demand for money. |
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The transaction demand for money. |
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None of the above since credit cards aren't money. |
4 points
Question 12
The portfolio demand for money reflects:
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The money we hold for our everyday transactions. |
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The portion of wealth people desire to hold in the form of money. |
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The money we hold to purchase stocks and bonds and other financial securities. |
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a and c |
4 points
Question 13
A rate of inflation that exceeds the growth rate of money for a country could be explained by:
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A growing real economy. |
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A constant velocity of money. |
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An increasing velocity of money. |
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A decreasing velocity of money. |
4 points
Question 14
Milton Friedman's assertion that “inflation is a monetary phenomenon” is based on:
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The quantity theory of money |
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The assumption of constant nominal GDP growth. |
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The assumption that the price level grows at the same rate as real GDP. |
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The assumption that the central bank increases the money supply by a constant rate every year. |
4 points
Question 15
A decline in the yields earned by bonds should:
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Not impact the demand for money since money doesn't earn any interest. |
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Also decrease the demand for money. |
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Increase the demand for money. |
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Increase the velocity of money. |
4 points
Question 16
Equilibrium in the money market would be expressed by which of the following?
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Ms = (1/V)Y |
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Ms = Md |
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Ms = (1/V)PY |
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a and b |
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b and c |
4 points
Question 17
As a person's wealth increases we would expect the demand for money to:
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Decrease. |
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Increase dollar for dollar with wealth. |
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Increase but at a rate less than dollar for dollar. |
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Money demand does not vary with wealth, only with income. |
4 points
Question 18
History proves that:
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Countries with low rates of money growth have high rates of inflation. |
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Money growth and inflation are not related. |
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Countries with high rates of money growth have high rates of inflation. |
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Money growth rates equal inflation rates. |
4 points
Question 19
If the Fed were to tie the rate of money growth to the Consumer Price Index (CPI), the rate of money growth might be excessive because:
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The CPI does not measure inflation at the household level. |
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Most economists maintain the CPI overstates inflation by 2 to 4 percent annually. |
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Most economists maintain the CPI overstates inflation by 1 percent annually. |
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Studies suggest that money growth is not related to the CPI. |
4 points
Question 20
The fact that people can write drafts (checks) from many stock and money market accounts has:
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Increased the transaction demand for money. |
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Decreased the transaction demand for money. |
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This doesn't impact the transaction demand for money. |
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Increased the cost of converting non-money assets to a means of payment. |
4 points
Question 21
In high inflation countries, inflation rates can exceed the rate of growth of money because:
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High inflation increases the velocity of money. |
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High rates of inflation increase the opportunity cost of holding money. |
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Money loses value quickly with inflation. |
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All of the above. |
4 points
Question 22
If an investor thinks interest rates are likely to rise, she would:
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Sell her bonds and hold more money. |
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Buy more bonds now and hold less money. |
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Not alter her bond portfolio until interest rates actually rise. |
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Not change her money holdings at all. |
4 points
Question 23
If we let Md reflect money demand, then we can write the equation for money demand as:
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Md = VY. |
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Md = PY. |
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Md = (1/V) PY. |
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Md = V(Y/P). |
4 points
Question 24
Crisis that occasionally hit financial markets will increase the demand for money since:
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The return on money increases. |
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The return on financial assets increases. |
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There is no risk with holding money. |
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The risk of holding money relative to other financial assets decreases. |
4 points
Question 25
The net cost of holding money is:
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The nominal interest rate. |
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The real interest rate. |
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The nominal interest rate less the cost of converting a bond to cash. |
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The rate of inflation. |
4 points