This work of ECO 316 Week 4 Chapter 23 The Demand for Money includes:

23.1 Multiple Choice Questions

1) In developing early theories about money demand, economists limited their view of money to

2) People use money primarily

3) The premise of the quantity theory of money demand is

4) A key problem with the basic quantity theory of money is that it

5) The demand for money for transactions is

6) Since 1965, the price level in the United States has

7) In order to buy in 2006 a bundle of goods that cost $100 in 1965, you would need roughly

8) If nothing else changes, a higher price level

9) If nominal money balances increase from $2 billion to $3 billion, while the price level increases from 100 to 150, real money balances will

10) If nominal money balances increase from $2 billion to $3 billion, while the price level increases from 100 to 200, real money balances will

11) Real money balances equal

12) When did Irving Fisher first develop the quantity theory of money demand?

13) The American economist who developed the quantity theory of money demand in the early 1900s was

14) The velocity of money represents

15) Transactions velocity

16) The volume of transactions is

17) Velocity equals

18) If the quantity of money is $4 trillion and nominal GDP is $8 trillion, velocity is

19) If the quantity of money is $1 trillion and real GDP is $4 trillion, velocity is

20) If on average a dollar is spent five times each year to purchase goods and services in the economy, then

21) The correct expression for the equation of exchange is

22) The equation of exchange

23) The equation of exchange is an identity because

24) In order to convert the equation of exchange into a theory of money demand, we need to rewrite it as

25) Irving Fisher converted the equation of exchange into a theory of money demand by assuming that

26) According to Irving Fisher, the demand for real money balances should

27) In the quantity theory of money demand,

28) Which of the following is a key assumption of Irving Fisher’s quantity theory of money demand?

29) During the 1980s, the velocity of M1

30) After 1987, the Fed

31) Which of the following central banks continues to emphasize the growth of the money supply in its conduct of monetary policy?

32) From 1959 to 1989, M2 velocity

33) Most of the collapse in M2 growth during the early 1990s can be explained by

34) In the period since 1914,

35) Which of the following statements is true concerning the velocity of M1?

36) Which of the following is a likely causative factor in the movement of M1 velocity during the 1980s?

37) The inclusion in M1 of interest-bearing substitutes for conventional checkable deposits in the early 1980s

38) Fluctuations in velocity indicate that

39) What are substitutes for money in transactions called?

40) If people use automated teller machines more frequently, what will happen to M1 velocity?

41) Holding everything else constant, the increased use of credit cards in recent years probably

42) If credit card companies imposed a per purchase charge for using their cards,

43) The quantity theory of money

44) The effects of interest rates on the transactions demand for money

45) The economist who has expanded the Baumol-Tobin approach to address effects of shifts between money and nonmoney assets on the economy is

46) In the Baumol-Tobin view of the transactions demand for money,

47) In the Baumol-Tobin view, a decrease in interest rates will cause individuals to hold

48) In the Baumol-Tobin view, an increase in interest rates will cause individuals to hold

49) According to Baumol and Tobin, the transactions demand for money is

50) The interest rate is a measure of

51) The fact that in addition to being a medium of exchange, money serves as a store of value means that

52) An individual with a high income will probably

53) Which of the following is true?

54) Money’s convenience yield is

55) Which of the following would cause demand for M1 to increase?

56) In which of the following books did J. M. Keynes first present the liquidity preference theory of the demand for money?

57) The liquidity preference theory was developed by

58) The liquidity preference theory emphasizes

59) The tendency of individuals to hold money to pay for unexpected transactions is known as

60) People’s decision to hold money based on the comparison of the relative returns of money and nonmoney assets is known as

61) Keynes referred to the effect of portfolio allocation decisions on the demand for money as the

62) Keynes assumed that the expected return on bonds is determined by

63) Keynes assumed that the return on money was

64) Keynes believed that people would hold less of their wealth in money when interest rates were high because

65) Keynes called the willingess of individuals to hold money to pay for unexpected transactions,

66) According to Keynes’s liquidity preference theory of the demand for money, the demand for money will

67) According to Keynes, the demand for real balances is best expressed by which of the following equations?

68) The expression for velocity derived from Keynes’s liquidity preference theory is

69) According to Keynes, if the interest rate on bond falls, but aggregate income doesn’t change,

70) Milton Friedman first proposed his explanation of money demand in

71) Milton Friedman’s approach to money demand focuses on

72) According to Milton Friedman, permanent income is

73) Friedman’s expression for the demand for real balances is

74) According to Friedman, the opportunity cost of holding money depends on all of the following EXCEPT

75) According to Friedman, the opportunity cost of holding money is determined by all of the following EXCEPT

76) An important difference between Keynes’s approach to the demand for money and Friedman’s approach is that

77) An important distinction between Friedman’s and Keynes’ view of money demand was that

78) In Friedman’s theory of money demand, when households expect a high rate of inflation, they will

79) Which of the following is NOT considered an important determinant of money demand?

80) An increase in expected inflation leads to a decline in money demand if

81) The most important difference between M1 and M2 is that

82) Weighted monetary aggregates differ from traditional monetary aggregates in that they

83) Divisa aggregates

84) Stephen Goldfeld’s estimate of the demand for money failed to predict the actual level of

85) During the early 1980s as interest-bearing checkable deposits were incorporated into the definition of M1,

86) Changes in the payments system

87) Why do most standard academic models used by economists ignore money?

88) Otmar Issing, former chief economist for the ECB, argued all of the following EXCEPT

23.2 Essay Questions

1) George has total wealth of $50,000. He allocates $40,000 to Treasury bills yielding 6% and $10,000 to a NOW account yielding 3%. What value does George place on his checkable deposits? What if the yield on T-bills rises to 12%?

2) Irving Fisher originally described velocity using transactions, rather than income or output. Would velocity calculated using transactions be a larger or a smaller number than velocity calculated using national income or GDP? Why do economists use income or output, rather than transactions, when calculating velocity? Under what circumstances might it matter how velocity is defined?

3) Why do economists and policy-makers view fluctuations in velocity as a problem? What action did the Fed take in the late 1990s that was related to uncertainty about the behavior of velocity?

4) Which model of the demand for real balances discussed in this chapter relies solely on the transactions motive? Is this model able completely to explain observed movements in real balances? Briefly explain why or why not.