Chapter 20 – Money Growth, Money Demand, and Modern Monetary Policy
1. History proves that:
A. Countries with low rates of money growth have high rates of inflation
2. Economic researchers have found:
D. No relationship between rates of money growth and inflation rates
Chapter 20 – Money Growth, Money Demand, and Modern Monetary Policy
3. When the currency loses value, causing people to spend it more quickly, this:
D. Causes even higher inflation than an increase in money growth would
4. Over the long run if central banks want to avoid high rates of inflation, they need to be
concerned with the:
D. Productivity of labor
5. Which of the following statements is most correct?
A. The current rate of inflation is the result of money growth
Chapter 20 – Money Growth, Money Demand, and Modern Monetary Policy
6. Consider the following ratio: the average annual inflation rate/the average annual money
growth rate. A country with a ratio less than one would have:
D. An economy suffering from a recession
7. Consider the following ratio: the average annual inflation rate/the average annual money
growth rate. If a country’s rate of money growth consistently exceeds the rate of inflation the
ratio would be:
D. Exactly one
8. 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:
A. Rapid economic growth
Chapter 20 – Money Growth, Money Demand, and Modern Monetary Policy
9. 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:
D. Returned to a gold standard
10. If money were valued in terms of how many minutes a person needs to work to buy a
dollar, an increase in the number of minutes of work needed would be:
D. No change in the real or nominal price of money
11. Inflation can be thought of as:
D. No change in the price of money, just in the demand for money
Chapter 20 – Money Growth, Money Demand, and Modern Monetary Policy
12. If we look at the value of money in terms of how many units of a good it takes to buy one
dollar, then inflation means:
D. It would take fewer dollars to buy the same goods
13. The velocity of money increases if:
D. None of the above answers is correct; the velocity of money is constant
14. The velocity of money equals:
A. Nominal GDP times the price level
Chapter 20 – Money Growth, Money Demand, and Modern Monetary Policy
15. 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 x M)/P
16. If the equation of exchange is MV = PY the Y represents:
D. Economic growth
17. If M2 is four times larger than M1, the velocity of M1 should be:
A. One-fourth of the velocity of M2
Chapter 20 – Money Growth, Money Demand, and Modern Monetary Policy
18. According to the equation of exchange, if real output and the money supply stay the same
and the price level increases:
D. Nominal GDP remains constant
19. Which of the following expresses the equation of exchange?
A. MY = PV
20. Using the equation of exchange, if inflation is 1.5%, real output grows by 3.0%, and the
growth rate of money is 5.0%, the change in the velocity of money is:
D. +0.5%
Chapter 20 – Money Growth, Money Demand, and Modern Monetary Policy
21. 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?
D. -1.0%
22. Using the equation of exchange, if inflation is 1%, the velocity of money grows by 1.0%
and the growth rate of money is 3.0%; what is real growth?
D. -1.0%
23. If on average, a dollar is spent 4 times each year to purchase real output, the velocity of
money is:
D. Nominal GDP divided by four
Chapter 20 – Money Growth, Money Demand, and Modern Monetary Policy
24. If the equation of exchange was expressed for all transactions in the economy instead of
real output, all other factors constant, the velocity of money would:
25. 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:
A. The CPI does not measure inflation at the household level
26. If we look at the equation for money demand from Irving Fisher, which of the following
statements is true?
Chapter 20 – Money Growth, Money Demand, and Modern Monetary Policy
27. 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
28. Key assumptions behind the quantity theory of money include:
D. The change in nominal GDP is zero
29. Milton Friedman’s assertion that “inflation is a monetary phenomenon” is based on:
D. The assumption that the central bank increases the money supply by a constant rate every
year
Chapter 20 – Money Growth, Money Demand, and Modern Monetary Policy
30. If we let Md reflect money demand, then we can write the equation for money demand
as:
A. Md =VY
31. Equilibrium in the money market would be expressed by which of the following?
D. Md = (1/V)P
32. The quantity theory of money can explain which of the following?
D. If the %P > 0, the %M must also be > 0
Chapter 20 – Money Growth, Money Demand, and Modern Monetary Policy
33. The quantity theory of money along with the assumption of a constant velocity can
explain which of the following?
D. If real growth equals money growth, the price level is falling
34. A rate of inflation that exceeds the growth rate of money for a country could be explained
by:
A. A growing real economy
35. Nobel-laureate economist Milton Friedman suggested that policymakers strive to ensure
that the monetary aggregates:
D. Remain constant in terms of dollar amounts
Chapter 20 – Money Growth, Money Demand, and Modern Monetary Policy
36. Control of money growth to stabilize inflation only works if velocity were constant. In
D. Can always safely be ignored
37. The empirical data reveals the velocity of M2 to be:
D. Higher than the velocity of M1
38. Which of the following statements is most correct?
Chapter 20 – Money Growth, Money Demand, and Modern Monetary Policy
39. If money growth and real output growth are both zero, the change in the price level will:
D. Be the inverse of the percentage change in velocity
40. During economic slowdowns (recessions) the velocity of money tends to:
A. Remain relatively stable
41. When nominal interest rates are high, the velocity of money should:
D. Decrease by the same percent that the nominal interest rate has increased
Chapter 20 – Money Growth, Money Demand, and Modern Monetary Policy
42. In the late 1970s and early 1980s, the velocity of money increased significantly. The main
reason(s) for the increase was:
A. As presidential election years near the velocity of money increases
43. If the nominal interest rate increases:
D. The cost of holding money increases and the velocity of money should decrease
44. In May of 2003, the European Central Bank (ECB) decided to:
D. Switch from an inflation target to a money growth target
Chapter 20 – Money Growth, Money Demand, and Modern Monetary Policy
45. Which of the following would reflect the transactions demand for money?
D. Buying a U.S. Treasury security using funds from your checking account
46. If real GDP stays the same but the price level increases:
A. Nominal money demand should remain the same
47. The higher the nominal interest rate:
D. The less money individuals will hold for any given level of transactions and the lower the
velocity of money
Chapter 20 – Money Growth, Money Demand, and Modern Monetary Policy
48. The opportunity cost of holding money is:
D. The rate of inflation
49. The fact that people can write drafts (checks) from many stock and money market
accounts has:
D. Increased the cost of converting non-money assets to a means of payment
50. All other factors equal, if the costs of converting bonds and other financial securities to a
means of payment increase:
D. Nominal interest rates should decrease
Chapter 20 – Money Growth, Money Demand, and Modern Monetary Policy
51. The interest rate earned on money holdings is:
A. The nominal interest rate
52. All other factors equal, as nominal interest rates decrease, checking account balances
should:
D. Be converted to cash
53. If you were going to write a function for money demand, you would say that the demand
for money holdings:
A. Varies directly with both the nominal interest rate and nominal income
Chapter 20 – Money Growth, Money Demand, and Modern Monetary Policy
54. Which of the following statements best completes the sentence, “All other factors
constant, as the nominal interest rate increases, the opportunity cost of money“?
A. Decreases, the velocity of money decreases, and the quantity of money people want to hold
decreases
55. In high inflation countries, inflation rates can exceed the rate of growth of money
because:
A. High inflation increases the velocity of money
56. Which of the following would be classified as precautionary demand for money?
A. You keep a $1000 in a money market account because the return is better than a savings
account at your bank
Chapter 20 – Money Growth, Money Demand, and Modern Monetary Policy
57. Money held for precautionary reasons is included in the demand for money:
D. Partly as transactions demand and partly as portfolio demand
58. The portfolio demand for money reflects:
D. The money we hold for our everyday transactions and the money we hold to purchase
stocks and bonds and other financial securities
59. The wide use of credit cards should have its greatest impact on reducing:
D. None of the answers given is correct since credit cards aren’t money