d.
velocity of money is zero.
The study of economics, and defi – The study of economics, and definitions of economics
Velocity and the Quantity Theory of Money
70. Which of the following will increase the velocity of circulation?
a.
Interest rates increase.
b.
The inflation rate decreases.
c.
Federal banking legislation abolishes credit cards.
d.
Employers decide to pay employees once a month instead of once a week.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Velocity and the Quantity Theory of Money
71. An employee of Macro.com Corporation is paid $5,000 a month, which she spends regularly throughout the month
until she has a zero balance in her checking account at the end of the month. If the corporation changes to a semi-monthly
payroll schedule, how will the employee’s average cash balance change? Assume she does not change her spending
pattern when she is now paid twice a month.
a.
It changes from $5,000 to $2,500 per month.
b.
It changes from $2,500 to $1,250 per month.
c.
It changes from $1,250 to $625 per month.
d.
It changes from $500 to $250 per month.
United States – BPROG: Analytic
Understanding and applying econo – Understanding and applying economic models
Velocity and the Quantity Theory of Money
72. If credit cards were suddenly ruled illegal and were no longer used, the most likely effect would be a decrease in the
a.
b.
c.
d.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Velocity and the Quantity Theory of Money
73. When the Fed increases the money supply, interest rates
a.
rise, causing velocity to fall.
b.
fall, causing velocity to fall.
c.
rise, causing velocity to rise.
d.
fall, causing velocity to rise.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Velocity and the Quantity Theory of Money
74. When the Fed decreases the money supply, interest rates
a.
rise, causing velocity to fall.
b.
fall, causing velocity to fall.
c.
rise, causing velocity to rise.
d.
fall, causing velocity to rise.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Velocity and the Quantity Theory of Money
75. The efficiency of the payments’ mechanism affects
a.
the speed with which money can be exchanged for other assets.
b.
how quickly individual loan applications will be approved.
c.
how slowly individuals deplete their cash balances.
d.
the speed with which financial institutions can process checks and other funds.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Velocity and the Quantity Theory of Money
76. The equation of exchange is an accounting identity that
a.
relates the money supply to nominal GDP.
b.
equates the demand for money with the supply of money.
c.
relates the money supply to real GDP.
d.
accounts use to balance assets and liabilities.
United States – BPROG: Analytic
The study of economics, and defi – The study of economics, and definitions of economics
Velocity and the Quantity Theory of Money
77. Which of the following will reduce the velocity of circulation of the money stock?
a.
The inflation rate increases.
b.
The interest rate falls.
c.
Credit cards are used more frequently.
d.
More employees are paid once a week instead of once a month.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Velocity and the Quantity Theory of Money
78. If the public decides to hold smaller cash balances, this will cause a(n)
a.
increase in interest rates.
b.
decrease in average paychecks.
c.
increase in nominal GDP.
d.
increase in velocity.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Velocity and the Quantity Theory of Money
79. If the Fed’s monetary policy causes a substantial increase in interest rates, what is the most likely impact on velocity?
a.
It will decrease.
b.
It will increase.
c.
It will remain constant.
d.
Velocity is unrelated to interest rates.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Velocity and the Quantity Theory of Money
80. If the Fed’s monetary policy causes a substantial decrease in interest rates, what is the most likely impact on velocity?
a.
It will decrease.
b.
It will increase.
c.
It will remain constant.
d.
Velocity is unrelated to interest rates.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Velocity and the Quantity Theory of Money
81. In 2007-2009, the Fed cut interest rates to limit the international financial crisis. What is the effect of this on velocity?
a.
It will decrease.
b.
It will increase.
c.
It will remain constant.
d.
Velocity is unrelated to interest rates.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Velocity and the Quantity Theory of Money
82. The inflation rate in January of 2009 as measured by the CPI was zero. If inflation were to remain at zero for a long
period, what would be the effect on velocity?
a.
It will decrease.
b.
It will increase.
c.
It will remain constant.
d.
Velocity is unrelated to interest rates.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Velocity and the Quantity Theory of Money
83. As the price level rises, the demand for money
a.
decreases because interest rates also increase.
b.
decreases because consumers buy fewer goods and services.
c.
increases because more money is needed for each transaction.
d.
increases because investment spending will also increase.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Velocity and the Quantity Theory of Money
84. Which one of the following will cause velocity to increase?
a.
a decrease in interest rates
b.
increasing the efficiency of the payments system
c.
switching from weekly to monthly payroll checks
d.
an increase in the money supply
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Velocity and the Quantity Theory of Money
85. In the short run, an increase in the quantity of money normally
a.
has no effect; in the long run, V will increase.
b.
has no effect; in the long run, V will decrease.
c.
results in an increase in velocity.
d.
results in a decrease in velocity.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Velocity and the Quantity Theory of Money
86. When analyzing how money affects income, we are analyzing the way in which a
a.
stock affects another stock.
b.
stock affects a flow.
c.
flow affects another flow.
d.
flow affects a stock.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Velocity and the Quantity Theory of Money
87. Economists observed the following growth rates in the fourth quarter of 1995: real GDP = 2.8 percent; M1 = 7.8
percent; GDP Deflator = 2.2 percent. Given this data, the growth of nominal GDP was approximately
a.
12.8 percent.
b.
10.0 percent.
c.
5.6 percent.
d.
5.0 percent.
e.
0.6 percent.
United States – BPROG: Analytic
Understanding and applying econo – Understanding and applying economic models
Velocity and the Quantity Theory of Money
88. Which of the following would tend to decrease velocity?
a.
an increase in interest rates
b.
more frequent paychecks
c.
expected decreases in inflation
d.
more efficient payment systems
c
Moderate
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Velocity and the Quantity Theory of Money
89. Economists observed the following growth rates in the fourth quarter of 1995: real GDP = 2.8 percent; M1 = 7.8
percent; GDP Deflator = 2.2 percent. Given this data, the growth of velocity was approximately
a.
−7.8 percent.
b.
−5.0 percent.
c.
−2.8 percent.
d.
−2.2 percent.
e.
−2.0 percent.
c
Difficult
United States – BPROG: Analytic
Understanding and applying econo – Understanding and applying economic models
Velocity and the Quantity Theory of Money
90. In the second quarter of 1995, the following values were observed: real GDP = 4,359.3 billion; GDP Deflator = 325.1;
and M1 = 989.5. What is the value of velocity?
a.
32.51
b.
24.31
c.
14.32
d.
2.31
c
Moderate
Models
United States – BPROG: Analytic
Understanding and applying econo – Understanding and applying economic models
Velocity and the Quantity Theory of Money
91. The principal factor determining velocity is the
a.
level of income.
b.
frequency with which paychecks are distributed.
c.
frequency with which taxes are paid.
d.
growth rate of real output.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Velocity and the Quantity Theory of Money
92. What is the effect on velocity if payments are made more often?
a.
It will decrease.
b.
It will increase.
c.
It will remain constant.
d.
Velocity is unrelated to payments.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Velocity and the Quantity Theory of Money
93. Velocity can be computed with the formula
a.
(Annual spending)/(Money supply).
b.
(Annual income)/(Annual spending).
c.
(Average income)/(Average spending).
d.
(Money supply)/(Average income).
United States – BPROG: Analytic
Understanding and applying econo – Understanding and applying economic models
Velocity and the Quantity Theory of Money
94. How will an increase in the efficiency of the payments mechanism effect velocity?
a.
It will decrease.
b.
It will increase.
c.
It will remain constant.
d.
Velocity is unrelated to payments.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Velocity and the Quantity Theory of Money
95. Following an anticapitalist coup, Freedonia forces all citizens to turn in and stop using all credit cards. What is the
most likely effect of this on velocity?
a.
It will decrease.
b.
It will increase.
c.
It will remain constant.
d.
Velocity is unrelated to credit cards.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Velocity and the Quantity Theory of Money
96. As we approached the end of the millennium, many economic crackpots advised citizens to hold large quantities of
cash in anticipation of Y2K disasters. What effect would this have had on velocity if many people had been foolish
enough to follow this advice?
a.
It would have decreased.
b.
It would have increased.
c.
It would have remained constant.
d.
Velocity is unrelated to cash balances.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Velocity and the Quantity Theory of Money
97. Many banks offer accounts featuring “Automatic Transfer from Savings” allowing customers to overdraw checking
accounts and the bank will transfer enough funds to cover the check automatically. Most likely, what is the effect of this
feature on velocity?
a.
It will decrease.
b.
It will increase.
c.
It will remain constant.
d.
Velocity is unrelated to saving accounts.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Velocity and the Quantity Theory of Money
98. In 2005-2006, the Fed increased interest rates in an attempt to halt inflation. What was the most likely effect of raising
interest rates on velocity?
a.
It will decrease.
b.
It will increase.
c.
It will remain constant.
d.
Velocity is unrelated to saving accounts.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Velocity and the Quantity Theory of Money
99. The reason that velocity increases when interest rates rise is
a.
the Fed encourages banks to turn money in faster for recycling, which causes money to move faster.
b.
the opportunity cost of saving increases, so people hold smaller cash balances.
c.
home mortgage payments increase, so people write larger checks that reduces their checking account balances.
d.
the opportunity cost of holding money increases, so average money balances decrease.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Velocity and the Quantity Theory of Money
100. If financial news broadcasts reported that inflation was likely to rise significantly next year, what would most likely
happen to the velocity of circulation?
a.
It will decrease.
b.
It will increase.
c.
It will remain constant.
d.
Velocity is unrelated to inflation.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Velocity and the Quantity Theory of Money
101. Which of the following will tend to increase velocity?
a.
a decrease in the number of payments
b.
a decrease in inflation
c.
an increase in interest rates
d.
an increase in the money supply
e.
All of the above.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Velocity and the Quantity Theory of Money
102. Monetarists maintain that
a.
the best way to study the economy is with the expenditure schedule.
b.
control over the money supply implies control over real GDP.
c.
velocity is not constant, but is fairly predictable.
d.
All of the above are correct.
United States – BPROG: Analytic
The study of economics, and defi – The study of economics, and definitions of economics
Velocity and the Quantity Theory of Money
103. When something happens to the economy, monetarists ask two questions:
a.
What does this do to government spending, and what does it do to tax revenues?
b.
What does this do to real GDP, and what does it do to the price level?
c.
What does this do to investment spending, and what does it do to net exports?
d.
What does this do to the money supply, and what does it do to velocity?
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Velocity and the Quantity Theory of Money
104. When comparing the Keynesian and monetarist approaches, the only substantive difference is that
a.
the Keynesian equation leads to a prediction of real GDP; the monetarist equation leads to a prediction of
nominal GDP.
b.
Keynesians concentrate on aggregate demand and monetarists concentrate on aggregate supply.
c.
Keynesians approach aggregate demand by multiplying the money supply by velocity, while monetarists use
the equilibrium conditions of the expenditure schedule.
d.
Keynesian analysis suggests that money affects consumption first while monetarist analysis suggests that
money affects investment spending first.
a
Difficult
DISC: The study of economics, an – DISC: The study of economics, and definitions in
United States – BPROG: Analytic
The study of economics, and defi – The study of economics, and definitions of economics
Velocity and the Quantity Theory of Money
105. ____ is a school of economic thought which uses equation of exchange to analyze the macro economic data.
a.
Mercantilism
b.
Monetarism
c.
Supply side economics
d.
Keynesianism
Moderate
DISC: The study of economics, an – DISC: The study of economics, and definitions in
United States – BPROG: Analytic
The study of economics, and defi – The study of economics, and definitions of economics
Velocity and the Quantity Theory of Money
106. The major limitation of both the Keynesian approach and the monetarist approach is that both
a.
focus on the determination of interest rates to the exclusion of price levels.
b.
study the determination of real GDP equilibrium without including the price level.
c.
are ways of studying the aggregate demand curve, but to learn anything about the price level and output, the
aggregate supply curve must be included in the analysis.
d.
concentrate on interest rates without considering changes in consumption or net exports.
c
Moderate
United States – BPROG: Analytic
The study of economics, and defi – The study of economics, and definitions of economics
Velocity and the Quantity Theory of Money
107. The major difference between the Keynesian approach and the monetarist approach is that
a.
Keynesian analysis explains an equilibrium condition and monetarism does not.
b.
in Keynesian analysis, money affects the economy by first affecting interest rates; monetarist analysis is not
limited to working through interest rates.
c.
monetarism explains an equilibrium condition and Keynesian analysis does not.
d.
there are no differences.
United States – BPROG: Analytic
The study of economics, and defi – The study of economics, and definitions of economics
Velocity and the Quantity Theory of Money
108. According to the simple quantity theory of money, a change in the money supply of 9.6 percent would lead to a
a.
9.6 percent change in velocity.
b.
9.6 percent change in real GDP.
c.
9.6 percent change in nominal GDP.
d.
9.6 percent change in aggregate supply.
United States – BPROG: Analytic
Understanding and applying econo – Understanding and applying economic models
Velocity and the Quantity Theory of Money
109. If economists say that a 7 percent growth in the money supply will increase aggregate demand by 7 percent, they are
assuming that velocity
a.
will decrease.
b.
is constant.
c.
will increase.
d.
is unpredictable.
United States – BPROG: Analytic
Understanding and applying econo – Understanding and applying economic models
Velocity and the Quantity Theory of Money
110. The difference between the equation of exchange and the quantity theory of money is that the
a.
equation of exchange assumes that the level of real GDP is constant.
b.
quantity theory of money assumes that the Fed has no control over the money supply.
c.
equation of exchange assumes that the level of nominal GDP is constant.
d.
quantity theory of money assumes that velocity is virtually constant.
United States – BPROG: Analytic
Understanding and applying econo – Understanding and applying economic models
Velocity and the Quantity Theory of Money
111. Which of the following best describes the assumption that monetarists make regarding velocity?
a.
It is fairly predictable in the short run and certainly in the long run.
b.
It is not possible to predict velocity in the short or long run.
c.
It is variable in the long run but predictable in the short run.
d.
It is constant in the long run but variable in the short run.
United States – BPROG: Analytic
Understanding and applying econo – Understanding and applying economic models
Velocity and the Quantity Theory of Money
112. Monetarists have received this label because they emphasize the role of
a.
money supply in determining aggregate supply.
b.
the money supply in determining nominal GDP.
c.
the Fed in making monetary policy.
d.
the money supply in determining interest rates and investment.
United States – BPROG: Analytic
Understanding and applying econo – Understanding and applying economic models
Velocity and the Quantity Theory of Money
113. In the monetarist view, the money supply affects the economy
a.
through investment spending and government spending.
b.
indirectly through interest rates.
c.
directly, apart from interest rates.
d.
by altering the size of the money multiplier.
DISC: The role of money
United States – BPROG: Analytic
The role of money
Velocity and the Quantity Theory of Money
114. Monetarism resembles Keynesian thinking in that they both
a.
emphasize supply and ignore demand.
b.
integrate supply-side analysis into their models.
c.
emphasize demand side effects.
d.
emphasize the importance of fiscal policy.
United States – BPROG: Analytic
Understanding and applying econo – Understanding and applying economic models
Velocity and the Quantity Theory of Money
115. A scatter diagram of money growth rates and inflation rates from 1982 to 2010 indicates
a.
a clear direct relationship between money growth and inflation.
b.
a clear indirect relationship between money growth and inflation.
c.
no clear relationship between money growth rates and inflation.
d.
that inflation is always and everywhere a monetary phenomenon.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Velocity and the Quantity Theory of Money
116. A factor increasing the popularity of monetarism in the late 1970s was the
a.
ease with which the Fed controlled the money supply.
b.
excellent performance of the economy in the 1970s.
c.
the fear of budget deficits and growing federal debt.
d.
the predictable behavior of velocity until about 1980.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Velocity and the Quantity Theory of Money
117. The relationship between money growth rates and inflation between 1982 and 2010 helps explain why, by the 1990s,
most economists had
a.
adopted the monetarist explanation of inflation.
b.
adopted a rules-only approach to monetary policy.
c.
become more convinced of the monetary causes of inflation.
d.
abandoned monetarism as the primary explanation of inflation.
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Velocity and the Quantity Theory of Money
118. Both approaches-Keynesian and monetarist-are ways of analyzing
a.
aggregate supply.
b.
aggregate demand.
c.
the average price level.
d.
government spending and expenditures.
DISC: Aggregate demand and aggre – DISC: Aggregate demand and aggregate supply
United States – BPROG: Analytic
Aggregate demand and aggregate s – Aggregate demand and aggregate supply
Velocity and the Quantity Theory of Money
119. According to the monetarists, the velocity of money is
a.
constant by definition.
b.
highly variable and unpredictable.
c.
constant as a matter of empirical proof.
d.
not constant but predictable.
United States – BPROG: Analytic
The study of economics, and defi – The study of economics, and definitions of economics
Velocity and the Quantity Theory of Money
120. According to the quantity theory of money, a decision on the part of all business firms currently paying employees
on a monthly basis to begin paying on a weekly basis would be expected to
a.
increase velocity and increase nominal GDP.
b.
increase velocity and decrease nominal GDP.
c.
decrease velocity and increase nominal GDP.
d.
decrease velocity and decrease nominal GDP.
DISC: The role of money
United States – BPROG: Analytic
The role of money
Velocity and the Quantity Theory of Money
121. If you believe that velocity is constant and that the aggregate supply curve is vertical, then the quantity theory of
money would predict that a doubling of the money supply would cause a doubling of
a.
nominal output and real output.
b.
nominal output and no change in real output.
c.
real output and no change in nominal output.
d.
the price level and real output.
DISC: Aggregate demand and aggre – DISC: Aggregate demand and aggregate supply
United States – BPROG: Analytic
Aggregate demand and aggregate s – Aggregate demand and aggregate supply
122. If you believe that velocity is constant and that the aggregate supply curve is horizontal, then the quantity theory of
money would predict that a doubling of the money supply would cause a doubling of the
a.
price level and real output.
b.
price level.
c.
price level and no change in real output.
d.
real output.
Moderate
DISC: Aggregate demand and aggre – DISC: Aggregate demand and aggregate supply
United States – BPROG: Analytic
Aggregate demand and aggregate s – Aggregate demand and aggregate supply
Velocity and the Quantity Theory of Money
123. According to the quantity theory of money currently used by monetarists, assuming velocity is constant (at a value of
5), a 10 percent increase in the money supply will raise
a.
nominal GDP by 50 percent.
b.
real GDP by 10 percent.
c.
nominal GDP by 10 percent.
d.
real GDP by 50 percent.
c
Moderate
United States – BPROG: Analytic
Understanding and applying econo – Understanding and applying economic models
Velocity and the Quantity Theory of Money
124. Monetarists use the equation of exchange to predict the effects of changes in M on
a.
velocity.
b.
nominal GDP.
c.
real GDP.
d.
the price level.
Easy
Models
United States – BPROG: Analytic
Understanding and applying econo – Understanding and applying economic models
Velocity and the Quantity Theory of Money
125. Economists who focus their analyses on the effects of a change in the money supply and velocity are called
a.
realists.
b.
Keynesians.
c.
supply-siders.
d.
monetarists.
Easy
United States – BPROG: Analytic
The study of economics, and defi – The study of economics, and definitions of economics
Velocity and the Quantity Theory of Money
126. Since the 1970s, the velocity of money has
a.
behaved in a predictable fashion.
b.
behaved in an erratic fashion.
c.
decreased in value.
d.
increased in a stable and predictable fashion.
Easy
DISC: Aggregate demand and aggre – DISC: Aggregate demand and aggregate supply
United States – BPROG: Analytic
Aggregate demand and aggregate s – Aggregate demand and aggregate supply
Velocity and the Quantity Theory of Money
127. For both Keynesians and monetarists to predict accurately the effects of a change in the money supply on the price
level, they need to add ____ to their analysis.
a.
aggregate demand
b.
nominal GDP
c.
real GDP
d.
aggregate supply
e.
government spending
Moderate
DISC: Aggregate demand and aggre – DISC: Aggregate demand and aggregate supply
United States – BPROG: Analytic
Aggregate demand and aggregate s – Aggregate demand and aggregate supply
Velocity and the Quantity Theory of Money
128. Which of the following is an example of unconventional monetary policy?
a.
the Federal Reserve selling T-bills
b.
the Federal Reserve decreasing the discount rate
c.
the Federal Reserve purchasing mortgage-backed securities
d.
none of the above
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Debate: Should the Fed Use Unconventional Monetary Policies?
129. Which of the following is an example of the Fed’s use of unconventional monetary policy?
a.
buying assets other than Treasury bills
b.
participating in rescue operations for troubled financial institutions
c.
lending massive amounts to banks and other financial institutions
d.
all of the above
DISC: Monetary and fiscal policy
United States – BPROG: Reflective Thinking – BPROG: Analysis
Monetary and fiscal policy
130. During the financial crisis of 2007-2009, why did the Federal Reserve begin to utilize various types of
unconventional monetary policy?
a.
the federal funds rate had already been increased as much as possible
b.
the discount rate had already been increased as much as possible
c.
the federal funds rate had already been reduced to zero
d.
the discount rate had already been reduced to zero
DISC: Monetary and fiscal policy
United States – BPROG: Analytic
Monetary and fiscal policy
Debate: Should the Fed Use Unconventional Monetary Policies?
131. During the financial crisis of 2007–2009 the interest rate on mortgage-backed securities had
a.
increased and the Treasury interest rate had risen.
b.
increased and the Treasury interest rate had fallen.
c.
decreased and the Treasury interest rate had risen.