The demand for money A) d and e are correct B) all of the following are correct

Question

The demand for money
A) d and e are correct
B) all of the following are correct
C) decreases as the average selling price of a unit of output increases
D) increases as GDP increases
E) is increased by credit card usage
2. The higher the interest rate, the more of their wealth people will hold as money.
A) True
B) False
3. The money demand curve slopes
A) downward because the cost of holding money decreases as the interest rate decreases
B) downward because the cost of holding money increases as the interest rate decreases
C) upward because people demand more money as GDP increases
D) upward because people demand more money as GDP decreases
E) downward because people demand more money as the price level increases
4. Which of the following, other things constant, will shift the money demand curve to the left?
A) an increase in the interest rate
B) a decrease in the interest rate
C) a decrease in real GDP
D) an increase in real GDP
E) an increase in the price level
5. An increase in the money supply will
A) increase the demand for money at each interest rate
B) decrease the demand for money at each interest rate
C) lead people to try to exchange money for interest-bearing assets
D) lead people to try to exchange interest-bearing assets for money
E) increase the interest rate
6. When an increase in the money supply reduces the interest rate, investment and nominal GDP increase.
A) True
B) False
7. In the short run, a decrease in the money supply will cause a decrease in Gross Domestic Product and a decrease in the price level.
A) True
B) False
8. The demand curve for investment is graphed with __________ on the vertical axis and __________ on the horizontal axis.
A) the interest rate; investment
B) investment; the interest rate
C) the price level; investment
D) investment; the price level
E) real GDP; investment
9. As the interest rate increases,
A) the demand for investment curve shifts to the right
B) the demand for investment curve shifts to the left
C) there is a movement downward along the demand for investment curve
D) there is a movement upward along the demand for investment curve
E) GDP increases
10. If the economy experiences a contractionary gap and the Fed stimulates the economy, then:
A) The money supply is increasing because the Fed prints more money
B) The money supply is decreasing because the Fed hoards money
C) The money supply is increasing because the Fed makes open-market purchases
D) The money supply is decreasing because the Fed makes open-market sales
E) There is no change in the money supply because the Fed cannot influence the money supply
11. If the Fed decreases the money supply, GDP
A) increases because the resulting increase in the interest rate leads to a decrease in investment
B) increases because the resulting decrease in the interest rate leads to an increase in investment
C) decreases because the resulting increase in the interest rate leads to a decrease in investment
D) decreases because the resulting increase in the interest rate leads to an increase in investment
E) decreases because the resulting decrease in the interest rate leads to an increase in investment
12. An increase in the money supply can increase the price level, real GDP, or both, but it is impossible to tell exactly what will happen without knowing the slope of the aggregate supply curve.
A) True
B) False
13. If the economy experiences an expansionary gap and the Fed sells US government securities in the open-market, then:
A) Money supply increases, investment increases, aggregate demand increases
B) Money supply increases, the interest rate increases, and the aggregate demand increases
C) Money supply decreases, the interest rate decreases, and the aggregate demand falls
D) Money supply decreases, the investment decreases, and the aggregate demand decreases
E) Interest rate falls, investment falls, aggregate demand increases
14. If the money supply equals $1,000 and nominal GDP equals $3,000, then V
A) equals 1/3
B) equals 3
C) equals 3 million
D) cannot be determined since we do not know anything about prices
E) cannot be determined since we do not know anything about real GDP
15. If the money supply is increasing at a constant 8 percent, velocity is constant, real GDP is increasing at 5 percent, and the inflation rate is 3 percent, which of the following is true?
A) The growth rate of GDP is too low to be maintained.
B) The inflation rate is too low to be maintained.
C) Velocity is too low to be maintained.
D) The money supply growth rate is too low to be maintained.
E) This situation can continue indefinitely.
16. If real output and velocity are stable and predictable, then the equation of exchange can be used to derive a simple relationship between
A) the money supply and the price level
B) the money supply and the interest rate
C) the money supply and the foreign exchange rate
D) velocity and real GDP
E) velocity and nominal GDP
17. For the quantity theory of money to yield useful predictions,
A) fiscal policy must be ineffective in altering aggregate demand
B) fiscal policy must be effective in altering aggregate demand
C) the economy must be operating at the potential level of real Gross Domestic Product
D) velocity must be stable or predictable
E) velocity must be unstable
18. A rising rate of inflation
A) makes people more willing to hold money as an asset
B) reduces the usefulness of money as a store of value and thus increases the velocity of money
C) increases the usefulness of money as a medium of exchange and thus reduces the velocity of money
D) is usually preceded by a reduction in the money supply
E) does not, apparently, have any effect on the velocity of money
19. There is considerable disagreement about whether the Fed should
A) engage in open market operations
B) have the power to set reserve requirements
C) reduce the money supply when the economy is growing
D) allow banks to invest in the stock market
E) attempt to control interest rates or should instead attempt to control the money supply
20. For interest rates to remain stable during economic expansions, the growth rate of the money supply should
A) exceed the growth in the demand for money
B) just match the growth in the demand for money
C) be less than the growth in the demand for money
D) be zero
E) just match the growth in nominal GDP

Explanation / Answer

1.The demand for money
D) increases as GDP increases

2. The higher the interest rate, the more of their wealth people will hold as money.
B) False

3. The money demand curve slopes
B) downward because the cost of holding money increases as the interest rate decreases

4. Which of the following, other things constant, will shift the money demand curve to the left?
A) an increase in the interest rate

5. An increase in the money supply will
C) lead people to try to exchange money for interest-bearing assets

6. When an increase in the money supply reduces the interest rate, investment and nominal GDP increase.
B) False

7. In the short run, a decrease in the money supply will cause a decrease in Gross Domestic Product and a decrease in the price level.
A) True

8. The demand curve for investment is graphed with __________ on the vertical axis and __________ on the horizontal axis.
A) the interest rate; investment

9. As the interest rate increases,
D) there is a movement upward along the demand for investment curve

10. If the economy experiences a contractionary gap and the Fed stimulates the economy, then:
C) The money supply is increasing because the Fed makes open-market purchases


11. If the Fed decreases the money supply, GDP
C) decreases because the resulting increase in the interest rate leads to a decrease in investment

12. An increase in the money supply can increase the price level, real GDP, or both, but it is impossible to tell exactly what will happen without knowing the slope of the aggregate supply curve.
A) True

13. If the economy experiences an expansionary gap and the Fed sells US government securities in the open-market, then:
A) Money supply increases, investment increases, aggregate demand increases

14. If the money supply equals $1,000 and nominal GDP equals $3,000, then V
A) equals 1/3
B) equals 3
C) equals 3 million
D) cannot be determined since we do not know anything about prices
E) cannot be determined since we do not know anything about real GDP

(Don't know)

15. If the money supply is increasing at a constant 8 percent, velocity is constant, real GDP is increasing at 5 percent, and the inflation rate is 3 percent, which of the following is true?
E) This situation can continue indefinitely.

16. If real output and velocity are stable and predictable, then the equation of exchange can be used to derive a simple relationship between
A) the money supply and the price level
B) the money supply and the interest rate
C) the money supply and the foreign exchange rate
D) velocity and real GDP
E) velocity and nominal GDP

(Don't know)

17. For the quantity theory of money to yield useful predictions,
D) velocity must be stable or predictable

18. A rising rate of inflation
B) reduces the usefulness of money as a store of value and thus increases the velocity of money

19. There is considerable disagreement about whether the Fed should
E) attempt to control interest rates or should instead attempt to control the money supply

20. For interest rates to remain stable during economic expansions, the growth rate of the money supply should
B) just match the growth in the demand for money

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