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# ECO 316 Week 4 Chapter 23 The Demand for Money

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.

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