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Chapter 16
Domestic and International Dimensions of Monetary Policy
16.1 The Demand for Money
1) What are the two features of money that distinguish it from all other goods in the economy?
A) Money is government issued and it is redeemable for gold or silver.
B) Money is accepted as a medium of exchange and it is the common unit of account used to
express prices.
C) Money is part of every barter transaction and it is divisible.
D) Money is a common unit of account and it is also can be traded for other currencies at a
guaranteed exchange rate.
2) Which of the following is a factor influencing the demand for money?
A) Transactions demand B) Precautionary demand
C) Asset demand D) All of the above are correct
3) Holding money to meet unplanned expenditures and emergencies is known as
A) transactions demand. B) precautionary demand.
C) asset demand. D) aggregate demand.
4) Money is a ________ and a transaction is a ________.
A) stock; stock B) flow; flow C) flow; stock D) stock; flow
5) According to the text, the main reason for people to hold money is
A) to enjoy looking at the pictures of past leaders.
B) to tell other people how rich they are.
C)
b
ecause they are irrational.
D) to use it for different reasons.
6) What is the most common reason people demand money?
A) Each bill and coin is a reflection of important people and events in a nation s history.
B) People desire to use money as a medium of exchange when they buy goods and services.
C) Since very few of us engage in a flow of transactions, money is our financial safety net.
D) They demand money to ensure that the nation s government will not spend too much.
7) When households hold money for unplanned expenditures and emergencies, it is called
A) the speculative demand for money. B) the transactions demand for money.
C) the irrational demand for money. D) the precautionary demand for money.
8) A person puts a $100 bill in the glove compartment of his car in case of an emergency. This is an
example of
A) the precautionary demand for money.
B) the transaction demand for money.
C) the emergency investment demand for money.
D) the asset demand for money.
9) The demand for money to cover unexpected expenditures and to meet emergencies is known as
A) the transactions demand for money. B) the precautionary demand for money.
C) the asset demand for money. D) the terminal demand for money.
10) Precautionary demand for money will fall when
A) the interest rate rises. B) the interest rate falls.
C) the money supply increases. D) government spending falls.
11) The precautionary demand for holding money arises because
A) people want be able to make unexpected purchases or to meet emergencies.
B) credit cards charge low interest rates, which makes money more attractive than credit.
C) people would rather hold money in the form of time deposits than in the form of hard
currency.
D) expected transactions are completed more easily with debit cards than with credit cards.
12) The transactions demand for money exists because households
A) are insensitive to interest rate changes.
B) must save for unexpected emergencies.
C) do not like the fact that money is a liquid asset.
D) do not receive their incomes at the same time they wish to make purchases.
13) When people want to hold money to make regular planned expenditures, this is
A) the transaction demand for money. B) the asset demand for money.
C) the precautionary demand for money. D) the spending demand for money.
14) As nominal Gross Domestic Product (GDP) rises, people will wish to
A) hold less money for transactions. B) hold more money for transactions.
C) spend less. D) invest only in stocks.
15) The transactions demand for money
A) varies negatively with nominal Gross Domestic Product (GDP).
B) varies inversely with nominal Gross Domestic Product (GDP).
C) varies directly with nominal Gross Domestic Product (GDP).
D) is unrelated to nominal Gross Domestic Product (GDP).
16) When interest rates rise, the transactions demand for money usually
A) decreases.
B) increases.
C) decreases initially and then increases to the original position.
D) does not change.
17) As nominal Gross Domestic Product (GDP) rises, the transactions demand for money
A) increases, and the money demand curve shifts to the left.
B) decreases, and the money demand curve shifts to the left.
C) increases, and the money demand curve shifts to the right.
D) remains constant, and the money demand curve remains the same.
18) The transactions demand for money
A) varies inversely with the precautionary demand for money.
B) varies directly with the rate of interest.
C) is a function of nominal Gross Domestic Product (GDP).
D) is determined by the Federal Reserve System.
19) The transactions demand for money will increase when
A) the rate of interest increases.
B) the price level falls.
C) nominal Gross Domestic Product (GDP) increases.
D) nominal Gross Domestic Product (GDP) decreases.
20) The transactions demand for money
A) varies directly with nominal Gross Domestic Product (GDP).
B) varies inversely with nominal Gross Domestic Product (GDP).
C) varies negatively with real nominal Gross Domestic Product (GDP).
D) has no relationship with nominal Gross Domestic Product (GDP).
21) The transactions demand for money refers to
A) the desire for wealth.
B) the demand to hold money for use in planned purchases.
C) the desire for income.
D) the demand to hold money as a long term store of value.
22) The asset demand for money is related to which function of money?
A) Medium of exchange B) Unit of accounting
C) Store of value D) Standard of deferred payment
23) When households choose to hold money as a store of value, rather than holding assets such as
certificates of deposit, stocks, and bonds, ________ demand for money results.
A) liquidity B) transactions C) precautionary D) asset
24) Suppose the typical household holds $1,000 when the interest rate is 5 percent. When the
interest rate rises to 6 percent, the typical household would most likely hold
A) more money because the opportunity cost of holding money is lower.
B) less money because the opportunity cost of holding money is lower.
C) more money because the opportunity cost of holding money is higher.
D) less money because the opportunity cost of holding money is higher.
25) What is a primary determinant of the asset demand for money?
I. the interest rate
II. the opportunity cost of holding money
III. the supply of money
A) I only B) III only C)
b
oth I and II D)
b
oth II and III
26) One of the economic costs of holding currency is that
A) it fulfills no precautionary role. B) it fulfills no transactions role.
C) it earns no interest income. D) its real value always increases.
27) The money demand function implies that money demand is
A) positively related to interest rates.
B) negatively related to bond prices.
C) negatively related to interest rates.
D) negatively related to transactions in the economy.
28) Both the precautionary and asset demand for money are influenced by
A) the U.S. Treasury. B) the interest rate.
C) gold prices. D) none of the above.
29) Using the interest rate as a measure of the opportunity cost of holding money, the demand for
money curve
A) slopes upward with respect to the rate of interest.
B) is not affected by the price level.
C) slopes downward with respect to the rate of interest.
D) is vertical.
30) When the rate of interest in the economy increases,
A) the market price of existing bonds will fall.
B) the transaction demand for money will increase.
C) real Gross Domestic Product (GDP) will increase.
D) the asset demand for money will increase.
31) When the rate of interest in the economy falls, there will be
A) an increase in the market price of existing bonds.
B) a decrease in the transaction demand for money.
C) less investment by businesses.
D) an increase in nominal Gross Domestic Product (GDP).
32) The opportunity cost of holding money refers to
A) the service fees associated with checking accounts.
B) the service fees associated with checking accounts plus the costs undertaken to prevent
theft.
C) the interest that could have been earned if the money balances had been transferred to an
interest bearing asset.
D) the pleasure that would have been received if the money balances had been used to buy a
good or service.
33) The demand for money curve is drawn with
A) the interest rate on the vertical axis and the curve sloping down.
B) the interest rate on the vertical axis and the curve sloping up.
C) nominal Gross Domestic Product (GDP) on the vertical axis and the curve sloping up.
D) nominal Gross Domestic Product (GDP) on the horizontal axis and the curve sloping
down.
34) Money s use in non
b
arter transactions relates to its role as a
A) store of value. B) medium of exchange.
C) unit of accounting. D) standard of deferred payment.
35) Asset demand for money is holding money
A) to meet unplanned expenditures and emergencies.
B) as a medium of exchange to make payments.
C) as a store of value instead of other assets.
D) to speculate on the stock market and bonds.
36) Something that affects the amount of money in existence will
A) have no particular effect.
B) not affect the economy as a whole but may affect certain key markets such as the market
for loans.
C) have an effect only if the change in money is large.
D) affect all markets.
37) Which of the following is a true statement?
A) To demand money is to demand wealth.
B) To demand money is to demand a higher income.
C) To use money, one must hold money.
D) To get more money, one must earn interest on money.
38) The demand for money refers to the desire to
A) hold a good that yields utility when it is consumed.
B) a high income.
C) spend money because money is used in all transactions.
D) hold money because money is used in all non
b
arter transactions.
39) The main reason people hold money is that
A) money provides a standard of value.
B) money is used to buy goods and services.
C) money is intrinsically valuable.
D) money is power.
40) Which of the following is NOT a reason why people are motivated to hold money?
A) Asset demand. B) Precautionary demand.
C) Liability demand. D) Transactions demand.
41) People demand money for all of the following reasons EXCEPT
A) it is a medium of exchange to make payments.
B) it generates a rate of return.
C) it can meet unplanned expenditures.
D) it is a store of value.
42) The transactions demand for money is the demand to hold money to
A) make regular, expected purchases.
B) meet unplanned expenditures.
C) store one s wealth.
D) purchase bonds when interest rates increase.
43) When a person holds money, they give up
A) the pleasure associated with spending money.
B) the pleasure associated with saving money.
C) the interest that could have been earned if the money had been changed into an
interest bearing asset.
D) nothing, since the person can always use the money to buy goods or services or
interest bearing assets.
44) The transaction demand for money varies
A) directly with the interest rate.
B) directly with nominal GDP.
C) inversely with nominal GDP and real GDP.
D) inversely with nominal GDP only.
45) As real GDP increases, people hold
A) less money because they will want to increase the amount of savings.
B) less money because they will want to collect interest.
C) about the same amount of money since that has been enough in the past.
D) more money since they will increase their purchases.
46) A major difference between the transactions demand for money and the precautionary demand
is that the
A) transactions demand means that people are foregoing interest but they are not foregoing
interest in the precautionary demand.
B) transactions demand leads to the purchase of assets while the precautionary demand does
not.
C) transactions demand involves expected expenditures while the precautionary demand
involves unexpected expenditures.
D) transactions demand is for emergencies while the precautionary demand is for every day
expenditures.
47) Holding money as a medium of exchange to make payments is
A) the transactions demand for money. B) the capital demand for money.
C) the precautionary demand for money. D) the asset demand for money.
48) Alberto purchases ten cups of coffee a week. The amount of money that he holds to purchase
ten cups of coffee is the
A) precautionary demand for money. B) transactions demand for money.
C) asset demand for money. D) money balance demand for money.
49) Holding money to meet unplanned expenditures is
A) the transactions demand for money. B) the capital demand for money.
C) the precautionary demand for money. D) the asset demand for money.
50) When the interest rate increases, people will adjust their precautionary demand for money
A) upward.
B) downward.
C) not at all.
D) downward or upward depending upon the actual supply of money.
51) The precautionary demand for money is when people hold money
A) for the interest it yields. B) as a store of value.
C) as a medium of exchange. D) to meet unplanned expenditures.
52) The relationship between the interest rate and the precautionary demand for money is
A) positive.
B) inverse.
C) positive sometimes and inverse other times.
D) nonexistent.
53) A person is preparing for a long automobile trip and cashes in a certificate of deposit for cash in
case of emergencies along the way. This is an example of the
A) transactions demand for money. B) precautionary demand for money.
C) wealth demand for money. D) asset demand for money.
54) Holding money as a store of value instead of other assets is
A) the transactions demand for money. B) the capital demand for money.
C) the precautionary demand for money. D) the asset demand for money.
55) The asset demand for money is related to the function of money called
A) medium of exchange. B) unit of account.
C) store of value. D) standard of deferred payment.
56) People hold money as an asset rather than other assets because
A) it is highly liquid.
B) it holds its value.
C) it grows in value.
D) there is no cost to holding money as an asset.
57)
J
avier has been thinking about purchasing a bond but is afraid that the bond will lose value. He
has decided to hold money instead. This is known as the
A) precautionary demand for money. B) transactions demand for money.
C) asset demand for money. D) money balance demand for money.
58) People hold money because it is liquid and lacks risk under the
A) money balance demand for money. B) asset demand for money.
C) precautionary demand for money. D) transactions demand for money.
59) The relationship between the interest rate and the asset demand for money is
A) positive.
B) inverse.
C) positive sometimes and inverse other times.
D) nonexistent.
60)
J
ohn gets paid monthly and pays for everything with cash. When he cashes his check he keeps
$200 for food, $100 for utilities, $900 for rent, $50 for transportation, $100 for entertainment and
$300 for unexpected expenditures. Which of the following statements is true?
A) The transactions demand for money is $1,350, the precautionary demand is $300 and the
asset demand is $0.
B) The transactions demand for money is $450, the precautionary demand is $300 and the
asset demand is $900.
C) The transactions demand for money is $350, the precautionary demand is $1,150 and the
asset demand is $150.
D) The transactions demand for money is $350, the precautionary demand is $950 and the
asset demand is $0.
61) George makes $250 a week working as a student aid. When he cashes his check he takes $100 to
the cashiers office to pay part of his tuition. $25 goes to paying off his books, $75 goes for
entertainment and $50 he keeps for unexpected expenditures. Which of the following statements
is true?
A) The transactions demand for money is $125, the precautionary demand is $75 and the
asset demand is $50.
B) The transactions demand for money is $0, the precautionary demand is $250 and the asset
demand is $0.
C) The transactions demand for money is $250, the precautionary demand is $0 and the asset
demand is $0.
D) The transactions demand for money is $200, the precautionary demand is $50 and the
asset demand is $0.
62) Samia makes $8,000 a month. Samia spends $2,500 on rent and related household expenses,
$500 on food, $200 on clothes, $500 on entertainment and $600 on transportation. She always
keeps $200 for things like the car breaking down. $3,500 is invested in the stock market. Which
of the following statements is true?
A) The transactions demand for money is $4,300, the precautionary demand is $200 and the
asset demand is $3,500.
B) The transactions demand for money is $4,300, the precautionary demand is $3,500 and the
asset demand is $200.
C) The transactions demand for money is $4,300, the precautionary demand is $200 and the
asset demand is $0.
D) The transactions demand for money is $3,500, the precautionary demand is $200 and the
asset demand is $4,300.
63) Suppose a family is holding $1000 in its checking account for normal transactions, $500 in cash
for emergencies, and $1500 as a store of value when the interest rate is 4 percent. If the interest
rate rises to 10 percent, which of the following patterns of holding money would be most likely
and why?
A) Transactions demand $1000; Precautionary demand $350; Asset demand $500, because
the opportunity cost of holding money has increased. The reduction money balances held
as an asset is greatest because interest bearing assets are much more attractive when
interest rates are higher.
B) Transactions demand $500; Precautionary demand $500; Asset demand $1400, because
the opportunity cost of holding money balances has risen. The reduction in money
balances held for transaction purposes falls the most because people start using credit
cards more when the opportunity cost of holding money increases.
C) Transactions demand $1000; Precautionary demand $500; Asset demand $500, because
only the asset demand is responsive to changes in the interest rate.
D) Transactions demand $800; Precautionary demand $600; Asset demand $1500, because
people can economize on their money balances for making transactions, but the possibility
of an emergency increases with the interest rate. People will also expect rates to go higher,
so they will hold money as an asset until the rates increase further.
64) The demand for money curve is drawn
A) holding several things constant, including GDP and interest rates.
B) holding several things constant, including the price level and interest rates.
C) with interest rates on the horizontal axis, and the curve sloping up since the price of
holding money varies directly with the interest rate.
D) with interest rates on the vertical axis and the curve sloping down since lower interest
rates mean the price of holding money has fallen.
65) When considering the demand for money curve, the interest rate
A) will have a positive relationship with the quantity of money demanded.
B) varies negatively with the transactions demand for money.
C) is the price of holding money.
D) is independent of the opportunity cost of money.
66) The opportunity cost of holding money is
A) the interest income foregone. B) the transactions demand for money.
C) contractionary monetary policy. D) the monetary rule.
67) The relationship between the quantity of money balances demanded and the interest rate is
A) determined by open market operations. B) negative.
C) contractionary monetary policy. D) the reserve requirements.
68) The demand for money curve
A) shows the relationship between money demanded and open market operations.
B) shows the relationship between the quantity of money balances demanded and the interest
rate.
C) is positively related to the interest rate.
D) varies inversely with the supply of money.
69) The reason that people may not want to hold money is
A) the precautionary demand for money and the risk of being robbed.
B) the opportunity cost.
C) the transactions demand makes it unnecessary.
D) due to the direct relationship between money demand and the interest rate.
70) The demand for money for which the purpose is making unexpected purchases or meeting
emergencies is considered to be part of
A) precautionary demand. B) transactions demand.
C) asset demand. D) savings demand.
71) In economics, the demand for money as basically a demand for
A)
b
onds. B) status. C) liquidity. D) investment.
72) Holding money as a medium of exchange to purchase goods and services and make payments
is known as the
A) spending demand for money. B) transactions demand for money.
C) precautionary demand for money. D) asset demand for money.
73) The demand for money curve depicts
A) an inverse relationship between the quantity of money demanded and the quantity of
bonds demanded.
B) a direct relationship between the quantity of money demanded and the quantity of bonds
demanded.
C) an inverse relationship between the quantity of money demanded and the interest rate.
D) a direct relationship between the quantity of money demanded and the interest rate.
74) Which of the following will tend to occur when the interest rate increases?
A) The demand for money curve shifts leftward.
B) The demand for money curve shifts rightward.
C) There is a rightward movement along the demand for money curve.
D) There is a leftward movement along the demand for money curve.
75) Which of the following will cause a reduction in the amount of money individuals wish to hold?
A) an increase in the interest rate B) an increase in income
C) an increase in the price level D) all of the above
76) The amount of money people wish to hold shows an inverse relationship to
A) their planned near term purchases. B) the money supply.
C) the income tax rate. D) the interest rate.
77) The amount of money that people wish to hold to use in transactions varies directly with
A) their planned near term purchases. B) the money supply.
C) the income tax rate. D) the interest rate.
78) The downward slope of the demand for money curve reflects the fact that
A) people hold more of their wealth in the form of money as the price level rises.
B) people hold more of their wealth in the form of money as the price level falls.
C) people hold more of their wealth in the form of money as the interest rate rises.
D) people hold more of their wealth in the form of money as the interest rate falls.
79) Which of the following is NOT a type of demand for holding money?
A) transactions demand B) precautionary demand
C) asset demand D) qualitative demand
80) Which of the following represents the opportunity cost of holding money?
A) liquidity B) the interest rate
C) the rate of inflation D) none of the above
81) The transactions demand for money is related to money functioning as a
A) unit of accounting. B) medium of exchange.
C) store of value. D) medium of deferred payment.
82) The demand for money is based on
A) the transactions demand, asset demand, and precautionary demand.
B) the demand for cash, demand for securities, and the demand for real estate.
C) the demand for consumption, demand for investment, and demand by government.
D) a demand for liquidity and wealth.
83) A person keeps $500 in his home in order to be prepared for some unforeseen future event. This
reflects his
A) speculative demand for money. B) asset demand for money.
C) precautionary demand for money. D) liquidity demand for money.
84) Asset demand for money is related to money functioning as a
A) unit of accounting. B) medium of exchange.
C) store of value. D) medium of deferred payment.
85) The interest rate is the opportunity cost
A) of investing in stocks. B) of investing in Treasury securities.
C) of using credit cards. D) of holding money.
86) If the interest rate increases, the
A) quantity of money demanded will remain unchanged.
B) money demand curve will shift to the right.
C) money demand curve will shift to the left.
D) quantity of money demanded will fall.
87) Warren always carries a one hundred dollar bill in case of emergencies. This is an example of
the
A) precautionary demand for money. B) asset demand for money.
C) transactions demand for money. D) wealth demand for money.
