Economics of Money, Banking, and Financial Markets, 12e, Global Ediiton (Mishkin)
Chapter 20 Quantity Theory, Inflation and the Demand for Money
20.1 Quantity Theory of Money
1) The quantity theory of money is a theory of how
A) the money supply is determined.
B) interest rates are determined.
C) the nominal value of aggregate income is determined.
D) the real value of aggregate income is determined.
2) Because the quantity theory of money tells us how much money is held for a given amount of
aggregate income, it is also a theory of
A) interest-rate determination.
B) the demand for money.
C) exchange-rate determination.
D) the demand for assets.
3) The average number of times that a dollar is spent in buying the total amount of final goods
and services produced during a given time period is known as
A) gross national product.
B) the spending multiplier.
C) the money multiplier.
D) velocity.
4) The velocity of money is
A) the average number of times that a dollar is spent in buying the total amount of final goods
and services.
B) the ratio of the money stock to high-powered money.
C) the ratio of the money stock to interest rates.
D) the average number of times a dollar is spent in buying financial assets.
5) If the money supply is $500 and nominal income is $3,000, the velocity of money is
A) 1/60.
B) 1/6.
C) 6.
D) 60.
6) If the money supply is $600 and nominal income is $3,000, the velocity of money is
A) 1/50.
B) 1/5.
C) 5.
D) 50.
7) If the money supply is $500 and nominal income is $4,000, the velocity of money is
A) 1/20.
B) 1/8.
C) 8.
D) 20.
8) If the money supply is $600 and nominal income is $3,600, the velocity of money is
A) 1/60.
B) 1/6.
C) 6.
D) 60.
9) If nominal GDP is $10 trillion, and the money supply is $2 trillion, velocity is
A) 0.2.
B) 5.
C) 10.
D) 20.
10) If nominal GDP is $8 trillion, and the money supply is $2 trillion, velocity is
A) 0.25.
B) 4.
C) 8.
D) 16.
11) If nominal GDP is $10 trillion, and velocity is 10, the money supply is
A) $1 trillion.
B) $5 trillion.
C) $10 trillion.
D) $100 trillion.
12) If the money supply is $2 trillion and velocity is 5, then nominal GDP is
A) $1 trillion.
B) $2 trillion.
C) $5 trillion.
D) $10 trillion.
13) If the money supply is $20 trillion and velocity is 2, then nominal GDP is
A) $2 trillion.
B) $10 trillion.
C) $20 trillion.
D) $40 trillion.
14) Velocity is defined as
A) P + M + Y.
B) (P × M)/Y.
C) (Y × M)/P.
D) (P × Y)/M.
15) The velocity of money is defined as
A) real GDP divided by the money supply.
B) nominal GDP divided by the money supply.
C) real GDP times the money supply.
D) nominal GDP times the money supply.
16) The equation of exchange states that the quantity of money multiplied by the number of
times this money is spent in a given year must equal
A) nominal income.
B) real income.
C) real gross national product.
D) velocity.
17) In the equation of exchange, the concept that provides the link between M and PY is called
A) the velocity of money.
B) aggregate demand.
C) aggregate supply.
D) the money multiplier.
18) The equation of exchange is
A) M × P = V × Y.
B) M + V = P + Y.
C) M + Y = V + P.
D) M × V = P × Y.
19) 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
20) In Irving Fisher’s quantity theory of money, velocity was determined by
A) interest rates.
B) real GDP.
C) the institutions in an economy that affect individuals’ transactions.
D) the price level.
21) The classical economists’ conclusion that nominal income is determined by movements in
the money supply rested on their belief that ________ could be treated as ________ in the short
run.
A) velocity; constant
B) velocity; variable
C) money; constant
D) money; variable
22) The view that velocity is constant in the short run transforms the equation of exchange into
the quantity theory of money. According to the quantity theory of money, when the money
supply doubles
A) velocity falls by 50 percent.
B) velocity doubles.
C) nominal incomes falls by 50 percent.
D) nominal income doubles.
23) Cutting the money supply by one-third is predicted by the quantity theory of money to cause
A) a sharp decline in real output of one-third in the short run, and a fall in the price level by one-
third in the long run.
B) a decline in real output by one-third.
C) a decline in output by one-sixth, and a decline in the price level of one-sixth.
D) a decline in the price level by one-third.
24) The classical economists believed that if the quantity of money doubled
A) output would double.
B) prices would fall.
C) prices would double.
D) prices would remain constant.
25) The classical economists’ contention that prices double when the money supply doubles is
predicated on the belief that in the short run velocity is ________ and real GDP is ________.
A) constant; constant
B) constant; variable
C) variable; variable
D) variable; constant
26) For the classical economists, the quantity theory of money provided an explanation of
movements in the price level. Changes in the price level result
A) from proportional changes in the quantity of money.
B) primarily from changes in the quantity of money.
C) only partially from changes in the quantity of money.
D) from changes in factors other than the quantity of money.
27) If initially the money supply is $1 trillion, velocity is 5, the price level is 1, and real GDP is
$5 trillion, an increase in the money supply to $2 trillion
A) increases real GDP to $10 trillion.
B) causes velocity to fall to 2.5.
C) increases the price level to 2.
D) increases the price level to 2 and velocity to 10.
28) If initially the money supply is $2 trillion, velocity is 5, the price level is 2, and real GDP is
$5 trillion, a fall in the money supply to $1 trillion
A) reduces real GDP to $2.5 trillion.
B) causes velocity to rise to 10.
C) decreases the price level to 1.
D) decreases the price level to 1 and decreases velocity to 2.5.
29) 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.
30) Fisher’s quantity theory of money suggests that the demand for money is purely a function of
________, and ________ no effect on the demand for money.
A) income; interest rates have
B) interest rates; income has
C) government spending; interest rates have
D) expectations; income has
31) ________ quantity theory of money suggests that the demand for money is purely a function
of income, and interest rates have no effect on the demand for money.
A) Keynes’s
B) Fisher’s
C) Friedman’s
D) Tobin’s
32) Irving Fisher’s view that velocity is fairly constant in the short run transforms the equation of
exchange into the
A) Friedman’s theory of income determination.
B) quantity theory of money.
C) Keynesian theory of income determination.
D) monetary theory of income determination.
33) The quantity theory of inflation indicates that the inflation rate equals
A) the growth rate of the money supply minus the growth rate of aggregate output.
B) the level of the money supply minus the level of aggregate output.
C) the growth rate of the money supply plus the growth rate of aggregate output.
D) the level of the money supply plus the level of aggregate output.
34) The quantity theory of inflation indicates that if the aggregate output is growing at 3% per
year and the growth rate of money is 5%, then inflation is
A) 2%.
B) 8%.
C) -2%.
D) 1.6%.
35) Empirical evidence shows that the quantity theory of money is a good theory of inflation
A) in the long run, but not in the short run.
B) in the short run, but not in the longrun.
C) in both the long run and the short run.
D) not in either the long run nor the short run.
20.2 Budget Deficits and Inflation
1) Methods of financing government spending are described by an expression called the
government budget constraint, which states the following
A) the government budget deficit must equal the sum of the change in the monetary base and the
change in government bonds held by the public.
B) the government budget deficit must equal the difference between the change in the monetary
base and the change in government bonds held by the public.
C) the government budget deficit must equal the difference between the change in the monetary
base and the change in government bonds held by the Fed.
D) the government budget deficit must equal the difference between the change in the monetary
base and the change in government bonds held by the Treasury.
2) Methods of financing government spending are described by an expression called the
government budget constraint, which states the following
A) DEFICIT = (G – T) = ΔMB + ΔBONDS.
B) DEFICIT = (G – T) = ΔMB – ΔBONDS.
C) DEFICIT = (G – T) = ΔBONDS – ΔMB.
D) DEFICIT = (G – T) = ΔMB/ΔBONDS.
3) If the government finances its spending by issuing debt to the public, the monetary base will
________ and the money supply will ________.
A) increase; increase
B) increase; decrease
C) decrease; increase
D) not change; not change
4) If the government finances its spending by selling bonds to the central bank, the monetary
base will ________ and the money supply will ________.
A) increase; increase
B) increase; decrease
C) decrease; decrease
D) not change; not change
5) Financing government spending with taxes
A) causes both reserves and the monetary base to rise.
B) causes both reserves and the monetary base to decline.
C) causes reserves to rise, but the monetary base to decline.
D) has no net effect on the monetary base.
6) Financing government spending by selling bonds to the public, which pays for the bonds with
currency,
A) leads to a permanent decline in the monetary base.
B) leads to a permanent increase in the monetary base.
C) leads to a temporary increase in the monetary base.
D) has no net effect on the monetary base.
7) The financing of government spending by issuing debt
A) causes both reserves and the monetary base to rise.
B) causes both reserves and the monetary base to decline.
C) causes reserves to rise, but the monetary base to decline.
D) has no net effect on the monetary base.
8) The finance of government spending through a Treasury sale of bonds which are then
purchased by the Fed
A) causes both reserves and the monetary base to rise.
B) causes both reserves and the monetary base to decline.
C) causes reserves to rise, but the monetary base to decline.
D) has no net effect on the monetary base.
9) This method of financing government spending is frequently called printing money because
high-powered money (the monetary base) is created in the process.
A) financing government spending with taxes
B) financing government spending through a Treasury sale of bonds that are then purchased by
the Fed
C) financing government spending by selling bonds to the public, which pays for the bonds with
currency
D) financing government spending by selling bonds to the public, which pays for the bonds with
checks
10) Only when budget deficits are financed by money creation does the increased government
spending lead to ________ in the ________.
A) a decrease; monetary base
B) an increase; monetary base
C) a decrease; money multiplier
D) an increase; money multiplier
11) If the deficit is financed by selling bonds to the ________, the money supply will ________,
increasing aggregate demand, and leading to a rise in the price level.
A) public; rise
B) public; fall
C) central bank; rise
D) central bank; fall
12) If the deficit is financed by selling bonds to the ________, the money supply will ________,
causing aggregate demand to ________.
A) public; rise; increase
B) public; fall; decrease
C) central bank; rise; increase
D) central bank; fall; decrease
20.3 Keynesian Theories of Money Demand
1) The Keynesian theory of money demand emphasizes the importance of
A) a constant velocity.
B) irrational behavior on the part of some economic agents.
C) interest rates on the demand for money.
D) expectations.
2) Keynes hypothesized that the transactions component of money demand was primarily
determined by the level of
A) interest rates.
B) velocity.
C) income.
D) stock market prices.
3) Keynes argued that the transactions component of the demand for money was primarily
determined by the level of people’s ________, which he believed were proportional to ________.
A) transactions; income
B) transactions; age
C) incomes; wealth
D) incomes; age
4) Keynes hypothesized that the precautionary component of money demand was primarily
determined by the level of
A) interest rates.
B) velocity.
C) income.
D) stock market prices.
5) Keynes argued that the precautionary component of the demand for money was primarily
determined by the level of people’s ________, which he believed were proportional to ________.
A) incomes; wealth
B) incomes; age
C) transactions; income
D) transactions; age
6) The demand for money as a cushion against unexpected contingencies is called the
A) transactions motive.
B) precautionary motive.
C) insurance motive.
D) speculative motive.
7) Keynes hypothesized that the speculative component of money demand was primarily
determined by the level of
A) interest rates.
B) velocity.
C) income.
D) stock market prices.
8) The speculative motive for holding money is closely tied to what function of money?
A) store of wealth
B) unit of account
C) medium of exchange
D) standard of deferred payment
9) Of the three motives for holding money suggested by Keynes, which did he believe to be the
most sensitive to interest rates?
A) the transactions motive
B) the precautionary motive
C) the speculative motive
D) the altruistic motive
10) Because Keynes assumed that the expected return on money was zero, he argued that people
would
A) never hold money.
B) never hold money as a store of wealth.
C) hold money as a store of wealth when the expected return on bonds was negative.
D) hold money as a store of wealth only when forced to by government policy.
11) The Keynesian theory of money demand predicts that people will increase their money
holdings if they believe that
A) interest rates are about to fall.
B) bond prices are about to rise.
C) expected inflation is about to fall.
D) bond prices are about to fall.
12) If people expect nominal interest rates to be higher in the future, the expected return to bonds
________, and the demand for money ________.
A) rises; increases
B) rises; decreases
C) falls; increases
D) falls; decreases
13) If people expect nominal interest rates to be lower in the future, the expected return to bonds
________, and the demand for money ________.
A) increases; increases
B) increases; decreases
C) decreases; increases
D) decreases; decreases