Chapter 20 – Money Growth, Money Demand, and Modern Monetary Policy
60. If your bank offers you free checking if your average balance is at least $1000 and you
would normally carry an average balance of $500, what is the annual cost to you of free
checking if bonds are paying a 5.0% return?
61. People have a portfolio demand for money in part because:
D. There is no cost to holding money which gives it a relatively high return
62. As a person’s wealth increases we would expect the demand for money to:
A. Decrease
Chapter 20 – Money Growth, Money Demand, and Modern Monetary Policy
63. A decline in the yields earned by bonds should:
A. Not impact the demand for money since money doesn’t earn any interest
64. If an investor thinks interest rates are likely to rise, she would:
D. Not change her money holdings at all
65. In the late 1990s, the financial crises that spread through the financial markets found
people:
A. Holding less money
Chapter 20 – Money Growth, Money Demand, and Modern Monetary Policy
66. Crises that occasionally hit financial markets will increase the demand for money since:
A. The return on money increases.
67. The demand for money varies:
A. Directly with the liquidity of other financial assets
68. 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
Chapter 20 – Money Growth, Money Demand, and Modern Monetary Policy
69. The only solution available to a country experiencing extremely high rates of inflation is
to:
A. Raise interest rates
70. Stable velocity as a contributing factor to successfully using money growth as a stabilizing
monetary policy tool, is more important in an environment where:
D. There is deflation
71. 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
Chapter 20 – Money Growth, Money Demand, and Modern Monetary Policy
72. To use money growth as a short-term monetary policy instrument, a central bank must:
D. Believe the deposit expansion multiplier is volatile and unpredictable
73. Empirical research has shown that:
D. During the 1980s and 1990s, the velocity of money actually decreased as the opportunity
cost of holding money increased
74. A cause of the decline in the velocity of money during the 2007-2009 financial crisis was
a result of:
A. the fiscal stimulus provided by the US government
Chapter 20 – Money Growth, Money Demand, and Modern Monetary Policy
75. 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
76. The relationship between the velocity of money and interest rates is:
D. Negative and stable
77. A major contributing factor to the instability of money demand over the past 25 years is
the:
D. Introduction of credit cards
Chapter 20 – Money Growth, Money Demand, and Modern Monetary Policy
78. The Lucas critique focuses specifically on:
D. The moving away from fixed exchange rates to flexible exchange rates
79. Between 1970 and 2000, the Fed:
A. Published their targets for money growth and often hit these targets
80. Between 1970 and 2000, if the Fed had tried to hit the money growth targets:
D. The economy would have likely experienced very high inflation but the interest rates
would have likely been more stable
Chapter 20 – Money Growth, Money Demand, and Modern Monetary Policy
81. Statistical analysis reveals that the long-run money velocity (for euro-area M3, which is
equivalent to U.S. M2):
A. Is unstable in the euro similar to the instability that exists in the U.S.
82. Which of the following statements is true?
D. Both the Fed and the ECB use growth in money aggregates as their operating target
83. A growing body of academic evidence, particularly from economists at the Bank for
International Settlements indicates that:
D. Monetary aggregates actually provide policymakers with incorrect signals about stresses in
the financial system
Chapter 20 – Money Growth, Money Demand, and Modern Monetary Policy
84. One cost that potentially could result from central banks targeting money growth is:
85. For a three-year period from October 1979 to October 1982; the FOMC:
D. Gave up targeting reserves entirely
86. During the period of October 1979 to October 1982; the FOMC’s primary operating target
resulted in:
A. The most stable period for the federal funds rate in history
Chapter 20 – Money Growth, Money Demand, and Modern Monetary Policy
87. In the late 1970s into the early 1980s, interest rates were high and very volatile. During
this period:
D. The Fed was actually targeting the short-term interest rate
88. 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
Short Answer Questions
89. Why does the Fed have to be concerned with money growth even though their main focus
seems to be on interest rates?
Chapter 20 – Money Growth, Money Demand, and Modern Monetary Policy
90. When the former Soviet Union collapsed in 1990, most of the countries that made up the
union experienced extremely high rate of inflation? What was the source of the high inflation
and why did it happen?
91. If velocity of money is constant; real growth in the output of the economy is +2.5%; and
inflation is 2.0%; what is the growth rate of money?
92. The equation of exchange which is MV = PY is an identity, which means it is true be
definition. If you think carefully, what variable in the equation by the way it is defined really
makes the equation of exchange an identity?
Chapter 20 – Money Growth, Money Demand, and Modern Monetary Policy
93. If the Fed wanted to target price stability, meaning zero inflation, why should it set a
target rate of inflation of around one percent?
94. The CPI is a commonly used and closely watched measure of inflation. However, it has
limitations. What are they?