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Q: Tobin's model of the speculative demand for money improves on Keynes's analysis by showing that A) the speculative demand for money is interest insensitive. B) the transactions demand for money is interest insensitive. C) people will hold a diversified portfolio. D) people will hold money or bonds but not both.

Q: In the Baumol-Tobin analysis of transactions demand, scale economies imply that an increase in real income increases the quantity of money demanded ________, while an increase in the price level increases the quantity of money demanded ________. A) proportionately; less than proportionately B) more than proportionately; proportionately C) less than proportionately; proportionately D) proportionately; more than proportionately

Q: In the Baumol-Tobin analysis of the demand for money, either an increase in ________ or an increase in ________ increases money demand. A) income; interest rates B) brokerage fees; interest rates C) interest rates; the price level D) brokerage fees; income

Q: In the Baumol-Tobin analysis of transactions demand for money, either an increase in ________ or a decrease in ________ increases money demand. A) income; interest rate B) interest rates; brokerage fees C) brokerage fees; income D) interest rate; income

Q: The Baumol-Tobin analysis suggests that a decrease in the brokerage fee for buying and selling bonds will cause the demand for money to ________ and the demand for bonds to ________. A) increase; increase B) increase; decrease C) decrease; decrease D) decrease; increase

Q: The Baumol-Tobin analysis suggests that an increase in the brokerage fee for buying and selling bonds will cause the demand for money to ________ and the demand for bonds to ________. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease

Q: The Baumol-Tobin analysis suggests that A) velocity is relatively constant. B) the transactions component of the demand for money is negatively related to the level of interest rates. C) the speculative motive is nonexistent. D) velocity is unrelated to the transactions motive.

Q: Comparing Tobin's model of the speculative demand for money with Keynesian speculative demandA) both models imply that individuals hold only money or only bonds.B) the Keynesian model implies individuals diversify their asset holdings, while the Tobin model predicts that individuals hold only money or only bonds.C) the Tobin model implies individuals diversify their asset holdings, while the Keynesian model predicts that individuals hold only money or only bonds.D) both models imply that individuals diversify their asset holdings.

Q: If there are economies of scale in the transactions demand for money, as income increases, money demand A) increases proportionately. B) increases less than proportionately. C) increases more than proportionately. D) does not change.

Q: The absence of money illusion means that A) as real income doubles, the demand for money doubles. B) as interest rates double, the demand for money doubles. C) as the money supply doubles, the demand for money doubles. D) as the price level doubles, the demand for money doubles.

Q: Describe what the liquidity trap is.Explain how it can be problematic for monetary policymakers.

Q: The reason that economists are so interested in the stability of velocity is because if the demand for money is not stable, then steady growth of the money supply A) is going to promote price stability at the expense of low unemployment. B) is going to promote low unemployment at the expense of price stability. C) is an ineffective way to conduct monetary policy. D) can still be used to conduct monetary policy if the goal is price stability.

Q: Evidence suggests that a liquidity trap is possible when A) real interest rates are at zero. B) real interest rates are at or just above zero. C) nominal interest rates are at zero. D) nominal interest rates are at or just above zero.

Q: In the liquidity trap, the money demand curve A) is horizontal. B) is vertical. C) is negatively sloped. D) is positively sloped.

Q: In the liquidity trap, monetary policy A) has a large impact on interest rates. B) has a small impact on interest rates. C) has no impact on interest rates. D) has a proportionate impact on interest rates.

Q: In a liquidity trap, monetary policy has ________ effect on aggregate spending because a change in the money supply has ________ effect on interest rates. A) no; no B) no; a large C) no; a small D) a large; a large

Q: In the liquidity trap a small change in interest rates produces ________ change in the quantity of money demanded. A) a small B) no C) a proportionate D) a very large

Q: The evidence on the interest sensitivity of the demand for money suggests that the demand for money is ________ to interest rates, and there is ________ evidence that a liquidity trap exists. A) sensitive; substantial B) sensitive; little C) insensitive; substantial D) insensitive; little

Q: The theory of portfolio choice indicates that factors affecting the demand for money include A) income. B) nominal interest rate. C) riskiness of money. D) all the above.

Q: The theory of portfolio choice indicates that factors affecting the demand for money include A) income. B) nominal interest rate. C) liquidity of other assets. D) all the above.

Q: The theory of portfolio choice indicates that higher interest rates make money ________ desirable, and the demand for real money balances ________. A) less; falls B) more; falls C) less; rises D) more; rises

Q: As interest rates rise, the expected absolute return of money ________, money's expected return relative to bonds ________. A) does not change; decrease B) rises; decrease C) does not change; increase D) falls; decrease

Q: The portfolio theories of money demand state that when income (and therefore, wealth) is higher, the demand for the money asset will ________ and the demand for real money balances will be ________. A) rise; higher B) rise; lower C) fall; higher D) fall; lower

Q: The portfolio theories of money demand state that the demand for real money balances is ________ related to income and ________ related to the nominal interest rate. A) positively; negatively B) positively; positively C) negatively; negatively D) negatively; positively

Q: Explain the Keynesian theory of money demand. What motives did Keynes think determined money demand? What are the two reasons why Keynes thought velocity could not be treated as a constant?

Q: The Keynesian demand for real balances can be expressed as A) Md = f(i,Y). B) Md/P = f(i). C) Md/P = f(Y). D) Md/P = f(i,Y).

Q: Keynes's liquidity preference theory indicates that the demand for money is ________ related to ________. A) negatively; interest rates B) positively; interest rates C) negatively; income D) negatively; wealth

Q: Keynes's model of the demand for money suggests that velocity is ________ related to ________. A) positively; interest rates B) negatively; interest rates C) positively; bond values D) positively; stock prices

Q: Keynes's liquidity preference theory indicates that the demand for money is A) constant. B) positively related to interest rates. C) negatively related to interest rates. D) negatively related to bond values.

Q: Keynes's model of the demand for money suggests that velocity is A) constant. B) positively related to interest rates. C) negatively related to interest rates. D) positively related to bond values.

Q: Keynes's theory of the demand for money is consistent with ________ movements in ________. A) countercyclical; velocity B) procyclical; velocity C) countercyclical; expectations D) procyclical; expectations

Q: Keynes's theory of the demand for money is consistent with A) countercyclical movements in velocity. B) a constant velocity. C) procyclical movements in velocity. D) a relatively stable velocity.

Q: Keynes's liquidity preference theory indicates that the demand for money A) is purely a function of income, and interest rates have no effect on the demand for money. B) is purely a function of interest rates, and income has no effect on the demand for money. C) is a function of both income and interest rates. D) is a function of both government spending and income.

Q: Because interest rates have substantial fluctuations, the ________ theory of the demand for money indicates that velocity has substantial fluctuations as well. A) classical B) Cambridge C) liquidity preference D) Pigouvian

Q: Keynes's theory of the demand for money implies that velocity is A) not constant but fluctuates with movements in interest rates. B) not constant but fluctuates with movements in the price level. C) not constant but fluctuates with movements in the time of year. D) a constant.

Q: According to Keynes's theory of liquidity preference, velocity increases when A) income increases. B) wealth increases. C) brokerage commissions increase. D) interest rates increase.

Q: Keynes argued that when interest rates were high relative to some normal value, people would expect bond prices to ________, so the quantity of money demanded would ________. A) increase; increase B) increase; decrease C) decrease; decrease D) decrease; increase

Q: Keynes argued that when interest rates were low relative to some normal value, people would expect bond prices to ________ so the quantity of money demanded would ________. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease

Q: If people expect nominal interest rates to be lower in the future, the expected return to bonds ________, and the demand for money ________. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases

Q: If people expect nominal interest rates to be higher in the future, the expected return to bonds ________, and the demand for money ________. A) rises; increases B) rises; decreases C) falls; increases D) falls; decreases

Q: The Keynesian theory of money demand predicts that people will increase their money holdings if they believe that A) interest rates are about to fall. B) bond prices are about to rise. C) expected inflation is about to fall. D) bond prices are about to fall.

Q: Because Keynes assumed that the expected return on money was zero, he argued that people would A) never hold money. B) never hold money as a store of wealth. C) hold money as a store of wealth when the expected return on bonds was negative. D) hold money as a store of wealth only when forced to by government policy.

Q: Of the three motives for holding money suggested by Keynes, which did he believe to be the most sensitive to interest rates? A) The transactions motive. B) The precautionary motive. C) The speculative motive. D) The altruistic motive.

Q: The speculative motive for holding money is closely tied to what function of money? A) Store of wealth B) Unit of account C) Medium of exchange D) Standard of deferred payment

Q: Keynes hypothesized that the speculative component of money demand was primarily determined by the level of A) interest rates. B) velocity. C) income. D) stock market prices.

Q: The demand for money as a cushion against unexpected contingencies is called the A) transactions motive. B) precautionary motive. C) insurance motive. D) speculative motive.

Q: Keynes argued that the precautionary component of the demand for money was primarily determined by the level of people's ________, which he believed were proportional to ________. A) incomes; wealth B) incomes; age C) transactions; income D) transactions; age

Q: Keynes hypothesized that the precautionary component of money demand was primarily determined by the level of A) interest rates. B) velocity. C) income. D) stock market prices.

Q: Keynes argued that the transactions component of the demand for money was primarily determined by the level of people's ________, which he believed were proportional to ________. A) transactions; income B) transactions; age C) incomes; wealth D) incomes; age

Q: Keynes hypothesized that the transactions component of money demand was primarily determined by the level of A) interest rates. B) velocity. C) income. D) stock market prices.

Q: The Keynesian theory of money demand emphasizes the importance of A) a constant velocity. B) irrational behavior on the part of some economic agents. C) interest rates on the demand for money. D) expectations.

Q: If the deficit is financed by selling bonds to the ________, the money supply will ________, causing aggregate demand to ________. A) public; rise; increase B) public; fall; decrease C) central bank; rise; increase D) central bank; fall; decrease

Q: If the deficit is financed by selling bonds to the ________, the money supply will ________, increasing aggregate demand, and leading to a rise in the price level. A) public; rise B) public; fall C) central bank; rise D) central bank; fall

Q: Only when budget deficits are financed by money creation does the increased government spending lead to ________ in the ________. A) a decrease; monetary base B) an increase; monetary base C) a decrease; money multiplier D) an increase; money multiplier

Q: This method of financing government spending is frequently called printing money because high-powered money (the monetary base) is created in the process. A) Financing government spending with taxes. B) Financing government spending through a Treasury sale of bonds that are then purchased by the Fed. C) Financing government spending by selling bonds to the public, which pays for the bonds with currency. D) Financing government spending by selling bonds to the public, which pays for the bonds with checks.

Q: The finance of government spending through a Treasury sale of bonds which are then purchased by the Fed A) causes both reserves and the monetary base to rise. B) causes both reserves and the monetary base to decline. C) causes reserves to rise, but the monetary base to decline. D) has no net effect on the monetary base.

Q: The financing of government spending by issuing debt A) causes both reserves and the monetary base to rise. B) causes both reserves and the monetary base to decline. C) causes reserves to rise, but the monetary base to decline. D) has no net effect on the monetary base.

Q: Financing government spending by selling bonds to the public, which pays for the bonds with currency, A) leads to a permanent decline in the monetary base. B) leads to a permanent increase in the monetary base. C) leads to a temporary increase in the monetary base. D) has no net effect on the monetary base.

Q: Explain and demonstrate graphically the situation of an overvalued exchange rate in a fixed exchange rate system. What alternative policies are available to eliminate the overvaluation of the exchange rate?

Q: Explain and show graphically the effect of an increase in the expected inflation rate on the equilibrium exchange rate, everything else held constant.

Q: Explain and show graphically the effect of an increase in the expected future exchange rate on the equilibrium exchange rate, everything else held constant.

Q: Explain and demonstrate graphically how targeting the federal funds rate can result in fluctuations in nonborrowed reserves.

Q: Explain and demonstrate graphically how targeting nonborrowed reserves can result in federal funds rate instability.

Q: Explain the Taylor rule, including the formula for setting the federal funds rate target, and the components of the formula. If the Fed were to use this rule, how many goals would it use to set monetary policy?

Q: Explain the complete formula for the M1 money supply, and explain how changes in required reserves, excess reserves, the currency ratio, the nonborrowed base, and borrowed reserves affect the money supply.

Q: Show graphically and explain the profits and losses of buying futures relative to buying call options.

Q: Using the long-run ISLM model, explain and demonstrate graphically the neutrality of money, for the case of an increase in the money supply.

Q: If the price level increases, everything else held constant, the ________ curve shifts to the ________. A) IS; right B) IS; left C) LM; left D) LM; right

Q: In the long-run the ISLM model predicts that ________ can change real output. A) only monetary policy B) only fiscal policy C) both monetary and fiscal policy D) neither monetary nor fiscal policy

Q: In the long-run ISLM model and with everything else held constant, the long-run effect of an autonomous fall in consumption expenditure is to ________ real output and ________ the interest rate. A) increase; increase B) increase; not change C) not change; increase D) not change; decrease

Q: In the long-run ISLM model and with everything else held constant, the long-run effect of a fall in net exports is to ________ real output and ________ the interest rate. A) increase; increase B) increase; not change C) not change; increase D) not change; decrease

Q: In the long-run ISLM model and with everything else held constant, the long-run effect of an autonomous increase in investment is to ________ real output and ________ the interest rate. A) increase; increase B) increase; not change C) not change; increase D) not change; decrease

Q: In the long-run ISLM model and with everything else held constant, the long-run effect of a tax cut is to ________ real output and ________ the interest rate. A) increase; increase B) increase; not change C) not change; increase D) not change; decrease

Q: In the long-run ISLM model and with everything else held constant, the long-run effect of a cut in government spending is to ________ real output and ________ the interest rate. A) increase; increase B) increase; not change C) not change; increase D) not change; decrease

Q: In the long-run ISLM model and with everything else held constant, the long-run effect of a contractionary fiscal policy is to ________ real output and ________ the interest rate. A) not change; not change B) decrease; decrease C) decrease; not change D) not change; decrease

Q: In the long-run ISLM model and with everything else held constant, the long-run effect of an expansionary fiscal policy is to ________ real output and ________ the interest rate. A) increase; increase B) not change; not change C) increase; not change D) not change; increase

Q: The long-run neutrality of money refers to the fact that in the long run, monetary policy A) changes only real output. B) changes only the real interest rate. C) changes both real output and the real interest rate. D) has no effect on either real output or the real interest rate.

Q: In the long-run ISLM model and with everything else held constant, the long-run effect of an expansionary monetary policy is to A) increase real output and the interest rate. B) not change either real output or the interest rate. C) increase real output and leave the interest rate unchanged. D) increase the interest rate and leave real output unchanged.

Q: In the long-run ISLM model and with everything else held constant, an increase in the money supply leaves the level of output and interest rates unchanged, an outcome called A) interest rate overshooting. B) long-run money neutrality. C) long-run crowding out. D) the long-run Phillips curve.

Q: In the long-run ISLM model and with everything else held constant, as long as the level of output ________ the natural rate level, the price level will continue to ________, shifting the LM curve to the ________, until finally output is back at the natural rate level. A) exceeds; rise; right B) exceeds; fall; left C) remains below; fall; right D) remains below; rise; left