39. In the liquidity-preference model, a decrease in the money supply causes
a. the nominal interest rate to increase and the equilibrium quantity of money to decrease.
b. the nominal interest rate to increase and the equilibrium quantity of money to remain unchanged.
c. the nominal interest rate to decrease and the equilibrium quantity of money to remain unchanged.
d. both the nominal interest rate and the equilibrium quantity of money to decrease.
40. In the liquidity-preference model, an increase in the money supply causes
a. the nominal interest rate to increase and the equilibrium quantity of money to decrease.
b. the nominal interest rate to increase and the equilibrium quantity of money to remain unchanged.
c. the nominal interest rate to decrease and the equilibrium quantity of money to remain unchanged.
d. the nominal interest rate to decrease and the equilibrium quantity of money to increase.
41. The liquidity effect is the
a. direct relationship between money supply and the real interest rate.
b. proportional relationship between money supply and money demand.
c. direct relationship between nominal money supply and the real money supply.
d. inverse relationship between money supply and the nominal interest rate.
42. In expansions, according to the liquidity-preference model, the increase in
nominal interest rate.
a. money supply; an increase
b. money supply; a decline
c. money demand; a decline
d. money demand; an increase
43. In recessions, according to the liquidity-preference model, the decline in
nominal interest rate.
a. money supply; an increase
b. money supply; a decline
c. money demand; a decline
d. money demand; an increase
leads to
leads to
in the equilibrium
in the equilibrium
44. Everything else remaining unchanged, if the price level in a country doubles, the quantity of money demanded
a. declines.
b. is unchanged.
c. doubles.
d. can increase or decline depending on the population of the concerned country.
45. A function that summarizes the relationship between the real demand for money, real income, and the nominal
interest rate is called the function.
a. real money-demand
b. nominal money–demand
c. interest-income
d. real income-demand
46. An advantage of using the real-money demand function is that it is unaffected by changes in
a. geographical location.
b. ruling political power.
c. prices of goods and services.
d. income of consumers.
47. Suppose the money demand function is
MD = P × [(0.25 × Y) − (100 × i)],
where Y is expressed in billions of dollars and i is expressed in percentage points. The term [(0.25 × Y) − (100 × i)]
is called
a. the nominal money-demand function.
b. the nominal money–supply function.
c. the real money–supply function.
d. the real money-demand function.
48. Suppose the money demand function is
MD = P × [(0.25 × Y) − (100 × i)],
where Y is expressed in billions of dollars and i is expressed in percentage points. If P = 2, Y = 5,000, and i = 5, then
the nominal quantity of money demanded equals
a. 750.
b. 1,000.
c. 1,500.
d. 2,000.
49. Suppose the money demand function is
MD = P × [(0.25 × Y) − (100 × i)],
where Y is expressed in billions of dollars and i is expressed in percentage points. If P = 2, Y = 5,000, and i = 5, then
the real quantity of money demanded equals
a. 750.
b. 1,000.
c. 1,500.
d. 2,000.
50. A model that does not allow variables to change over time is referred to as a
a. static model.
b. dynamic model.
c. partial–equilibrium model.
d. general–equilibrium model.
51. A model that allows variables to change over time is referred to as a
a. static model.
b. dynamic model.
c. partial–equilibrium model.
d. general–equilibrium model.
52. The liquidity-preference model of money is a
a. static general-equilibrium model.
b. dynamic general–equilibrium model.
c. static partial-equilibrium model.
d. dynamic partial-equilibrium model.
53. In the dynamic model of money,
a. both people’s income and money supply are endogenous variables.
b. both people‘s income and money supply are exogenous variables.
c. people’s income is an endogenous variable, while money supply is an exogenous variable.
d. people’s income is an exogenous variable, while money supply is an endogenous variable.
54. At the starting point of a dynamic model,
a. all variables measure zero.
b. key variables of a model are growing at a decreasing rate.
c. key variables of a model are growing at an increasing rate.
d. key variables in the model are constant or growing at a constant rate.
55. A steady state is a situation in which the key variables in the model
a. are constant or else growing at a constant rate.
b. are growing at a decreasing rate.
c. are endogenous.
d. measure zero.
56. A steady state
a. is a short-run equilibrium which describes what the exogenous variables in a model will do if they are not
disturbed by any other variable in the model.
b. is a short-run equilibrium which describes what the endogenous variables in a model will do if they are not
disturbed by any other variable in the model.
c. is a long-run equilibrium which describes what the exogenous variables in a model will do if they are not
disturbed by any other variable in the model.
d. is a long-run equilibrium which describes what the endogenous variables in a model will do if they are not
disturbed by any other variable in the model.
57. A change to a variable in a model that causes other variables to deviate from their long-run equilibrium values in the
short run or in the long run is referred to as a
a. deviation.
b. shock.
c. standard deviation.
d. disequilibrium catalyst.
58. In a dynamic model of money, if money supply and trend output is constant over time
a. nominal supply of money will increase, while nominal demand for money will be constant.
b. nominal supply of money will decrease, while nominal demand for money will be constant.
c. nominal supply of money will be constant, while nominal demand for money will decrease.
d. both the nominal supply of money and nominal demand for money will be constant.
59. Which of the following statements is true?
a. In a static model, an economy is assumed to start at a point where all variables are constant.
b. In the dynamic model of money, the longer prices take to adjust to shocks, the more long-lived is the liquidity
effect.
c. In the dynamic model of money, all variables are initially growing at an increasing rate but they eventually
reach a steady state.
d. Money supply is the only endogenous variable in the dynamic model of money.
60. In the dynamic model of money, an increase in the price level causes an increase in money demand, thus leading to a
higher nominal interest rate. This effect is referred to as the
a. price-level effect.
b. income effect.
c. liquidity effect.
d. inflationary effect.
61. The income effect refers to the situation when a higher nominal interest rate results from a(n)
a. decrease in income that increases the demand for money.
b. increase in income that increases the demand for money.
c. increase in the price level that increases the demand for money.
d. decrease in the price level that increases the demand for money.
62. Econometrics is
a. a system of measuring economic variables.
b. the study of public finance.
c. the use of statistical techniques on economic data.
d. the use of mathematical techniques on economic data.
63. Regression analysis is a key method used in econometrics in which the coefficients of an equation are calculated by
finding values for them that make the as small as possible.
a. correlation
b. standard error
c. sum of the squared error terms
d. confidence interval
64. Research by Laurence Ball showed that
a. the coefficients of money demand were smaller by half than what previous researchers had found.
b. nominal interest rates fell with an increase in money demand.
c. earlier researchers had estimated the money-demand function very precisely and their results held up when
additional data was available.
d. increase in money supply can accelerate inflation.
65. The Friedman rule suggests that
a. the optimal nominal interest rate in an economy should be negative.
b. the optimal nominal interest rate in an economy should be positive.
c. the optimal nominal inflation rate in an economy should be positive.
d. the optimal nominal inflation rate in an economy should be negative.
66. Assume that the nominal interest rate in an economy is 3 percent and the cost of going to the ATM is $1.50. You
spend $5 each day, and there is also a 12 percent probability of having your cash lost or stolen.
a. What is your total cost of holding cash as a function of the number of days between trips to
the ATM?
b. How often will you go to the ATM to minimize your costs?
67. Suppose you have a 20 percent probability of having your cash lost or stolen, and you spend $25 each day. Your total
cost of holding cash is (182.50/T) + (3.75 × T).
a. What is your cost of going to the ATM?
b. What is the nominal interest rate?
c. How often will you go to the ATM to minimize your costs?
68. Describe three different changes in the ATM model that would increase the time between ATM visits and increase
the quantity of money demanded.
69. What will happen to the nominal interest rate and the equilibrium quantity of money because of the following
changes?
a. A decline in people’s incomes
b. An increase in the level of prices
c. A decline in the supply of money
70. Suppose the money demand function is
MD = P × [(0.25 × Y) − (100 × i)],
where Y is expressed in billions of dollars and i is expressed in percentage points.
a. Suppose that initially P = 2, Y = 5,000, and i = 5. If income rises to 6,000, what is the new
equilibrium nominal interest rate?
b. Suppose that initially P = 3, Y = 4,000, and i = 7. If the price level falls to 2, what is the new
equilibrium nominal interest rate?
71. Suppose, the money-demand equation is given by
MD = P × [(0.25 × Y) − (15 × i)],
where P is the price level, Y is the level of output in billions, and i is the interest rate in percentage points. Initially, P
= 2, Y = $500, and i = 3. If Y rises to $600 and the price level does not change, by how much should the Fed change
the money supply if it wants to keep the nominal interest rate unchanged? Should the money supply rise or fall, and
by how much? Use the liquidity-preference framework and show a diagram of this situation.
72. In a dynamic model, what three key assumptions are needed to make the prices of goods and services endogenous?
73. Consider the standard dynamic model of money in which the economy is in a steady state with constant levels of
output, inflation, and the nominal interest rate. Suppose initially that the steady-state nominal interest rate is 4 percent,
the steady-state inflation rate is 2% percent, and the growth rate of the money supply is 2 percent. How will an
unanticipated permanent decline in the growth rate of the money supply to 0 percent affect the level of output, the
inflation rate, and the nominal interest rate?
74. Describe the standard equation used to describe the demand for money. In that equation, what would happen to the
demand for money if prices were to double?
75. Describe in words the relationships established in the two equations used by the Federal Reserve to forecast the
demand for M2.