Name:________________________ Econ 333 Homework #12 Mutilple Choice Questions: Please choose the best answer of the choices presented in the multiple choice questions. 1. 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 2. 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 3. For many of the countries that made up the Soviet Union, the period immediately following the collapse of the Soviet Union in 1990 found these countries experiencing extremely high rates of inflation. To solve this problem, a number of countries: A. Turned the authority to print money over to an independent central bank B. Imposed price controls C. Devalued their currencies D. Returned to a gold standard 4. 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 5. If M = the money supply; Y = real output, P = the price level, and V = velocity, which of the following equals the velocity of money? A. (Y?M)/P B. (P?M)/Y C. (P?Y)/M D. (P?Y) +M 6. 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 7. 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 8. According to the equation of exchange, if real output and the money supply stay the same and the price level increases: A. The velocity of money has to increase B. The velocity of money has to decrease C. The real GDP had to rise D. Nominal GDP remains constant 9. Which of the following expresses the equation of exchange? A. MY = PV B. MV = Y C. MV = PY D. MP = VY 10. Using the equation of exchange, if real GDP increases by 3.0%, the velocity of money grows by 1.0% and the growth rate of money is 3.0%; what is the rate of inflation? A. +1.0% B. It is constant or a 0% change C. It is the same as the growth rate of money, or 3.0% D. ?1.0% 11. 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 are correct 12. 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 13. 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 14. 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) 15. 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 16. The quantity theory of money along with the assumption of a constant velocity can explain which of the following? A. At a given level of money growth, the higher the level of real growth the higher the level of inflation will be B. At a given level of money growth, the higher the level of real growth the lower the level of inflation will be C. If real growth is higher than money growth the price level must be rising D. If real growth equals money growth, the price level is falling 17. 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 18. Which of the following statements is most correct? A. The velocity of M2 is relatively stable across all time periods B. The velocity of M2 is less stable than the velocity of M1 C. The velocity of M2 is more volatile in the short run than the long run D. Fisher's assumption about money velocity being stable in the long run was incorrect 19. During economic slowdowns (recessions) the velocity of money tends to: A. Remain relatively stable B. Increase slightly C. Increase dramatically D. Decrease 20. 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 21. 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 22. The opportunity cost of holding money is: A. The nominal interest rate B. The real interest rate C. The nominal interest rate less the cost of converting a bond to cash D. The rate of inflation 23. All other factors equal, if the costs of converting bonds and other financial securities to a means of payment increase: A. The transactions demand for money should increase B. The transactions demand for money should decrease C. It shouldn't impact the transactions demand for money D. Nominal interest rates should decrease 24. The interest rate earned on money holdings is: A. The nominal interest rate B. The nominal interest rate less the rate of inflation C. The real interest rate less the rate of inflation D. Zero 25. The wide use of credit cards should have its greatest impact on reducing: A. The portfolio demand for money B. The precautionary demand for money C. The transaction demand for money D. None of the answers given is correct since credit cards aren't money 26. People have a portfolio demand for money in part because: A. Money is part of a well diversified financial portfolio B. The return on money is often higher than other financial assets C. Money is needed to pay brokerage commissions D. There is no cost to holding money which gives it a relatively high return 27. As a person's wealth increases we would expect the demand for money to: A. Decrease B. Increase dollar for dollar with wealth C. Increase but at a rate less than dollar for dollar D. Not change; money demand does not vary with wealth, only with income 28. A decline in the yields earned by bonds should: A. Not impact the demand for money since money doesn't earn any interest B. Also decrease the demand for money C. Increase the demand for money D. Increase the velocity of money 29. If an investor thinks interest rates are likely to rise, she would: A. Sell her bonds and hold more money B. Buy more bonds now and hold less money C. Not alter her bond portfolio until interest rates actually rise D. Not change her money holdings at all 30. In the late 1990s, the financial crises that spread through the financial markets found people: A. Holding less money B. Increasing their holdings of bonds C. Holding more money D. Holding less money and increasing their holdings of bonds 31. The demand for money varies: A. Directly with the liquidity of other financial assets B. Inversely with the liquidity of other financial assets C. Not all with the liquidity of other assets since money is liquid D. Inversely with wealth 32. You graduate from law school and can now begin charging clients very high fees for your time. What impact will this have on your demand for money? A. Your increased income will likely cause your demand for money to decrease B. Your opportunity cost of making trips to the bank will decrease C. Your increased income will likely cause your demand for money to increase D. Your demand for money will not be affected 33. The only solution available to a country experiencing extremely high rates of inflation is to: A. Raise interest rates B. Peg your currency to another country's currency C. Reduce money growth D. Revert to a gold standard 34. For the Fed to use money growth as a direct monetary policy target, which of the following needs to exist? A. A highly variable deposit expansion multiplier B. A stable link between the monetary base and the quantity of money C. A predictable relationship between the quantity of money and the rate of inflation D. A stable link between the monetary base and the quantity of money and a predictable relationship between the quantity of money and the rate of inflation 35. 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: A. The supply of money is not stable B. The money market is always in disequilibrium C. Money demand is stable D. Money demand is not stable 36. The Lucas critique focuses specifically on: A. The relationship between Fed policy and the money supply B. The role that economic policymaking has on people's economic behavior C. The inability to measure economic performance accurately D. The moving away from fixed exchange rates to flexible exchange rates 37. A growing body of academic evidence, particularly from economists at the Bank for International Settlements indicates that: A. Monetary aggregates can be ignored without impairing the effectiveness of monetary policy B. Monetary aggregates even in low inflation countries contain useful information about stresses in the financial system C. Monetary aggregates only matter when inflation is high D. Monetary aggregates actually provide policymakers with incorrect signals about stresses in the financial system 38. One cost that potentially could result from central banks targeting money growth is: A. High inflation B. A slowdown in financial innovation C. Volatile interest rates D. Decreased independence 39. If a central bank sets an explicit inflation target, the central bank must: A. Put more emphasis on the interest rate target and less on a money target B. Shift its focus entirely to a nominal interest rate target C. Give up control of targeting the monetary base D. Be willing to live with more volatility in the interest rate Short Answer Questions: Please answer the following questions as fully as possible. 40. If the Fed wanted to target price stability, meaning zero inflation, why should it set a target rate of inflation of around one percent? 41. Professor Milton Friedman stated that "inflation is a monetary phenomenon." What did he mean by this statement and what is the basis for this assertion? 42. What factors can cause the portfolio demand for money to increase? user ch20
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