Q&A Hero

Q: Comparing Tobin's model of the speculative demand for money with Keynesian speculative demand A. 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: 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: The monetary policy strategy that does NOT allow the policy to focus on domestic considerations is A) exchange-rate targeting. B) monetary targeting. C) inflation targeting. D) the implicit nominal anchor.

Q: The monetary policy strategy that provides an automatic rule for the conduct of monetary policy is A) exchange-rate targeting. B) monetary targeting. C) inflation targeting. D) the implicit nominal anchor.

Q: The seignorage for a government is greater for ________ than for ________. A) dollarization; a currency board B) dollarization; exchange-rate targeting C) dollarization; monetary targeting D) dollarization; inflation targeting E) exchange-rate targeting; dollarization

Q: A country that dollarizes A) maximizes its seignorage. B) earns the same amount of seignorage as it would with a currency board. C) earns the same amount of seignorage as it would with exchange-rate targeting. D) eliminates its seignorage. E) must pay seignorage to other governments to use their currency.

Q: The revenue a government gains from issuing money is________A) interest.B) rent.C) seignorage.D) the national dividend.E) the inflation tax.

Q: When a country forgoes its own currency and starts using another country's currency as its own, we say that this country has________A) created a currency board.B) undergone dollarization.C) adopted a managed exchange system.D) adopted an exchange rate monetary system.

Q: When a domestic currency is completely backed by a foreign currency and the note-issuing authority establishes a fixed exchange rate to this foreign currency, then the country is said to have A) created a currency board. B) undergone dollarization. C) adopted a managed exchange system. D) adopted an exchange rate monetary system.

Q: Because many emerging market countries have not developed the political or monetary institutions that allow the successful use of discretionary monetary policy A) they have little to gain from pegging their exchange rate to an anchor country like the U.S. or Germany. B) they have little to gain from using a nominal anchor, because it would mean a monetary policy that is overly expansionary. C) they have very little to gain from an independent monetary policy, but a lot to lose. D) they would be better off giving their central bankers the independence to use discretion, rather than take their discretion away through any nominal anchor.

Q: An emerging market country that successfully used exchange-rate targeting to lower its inflation from above 100 percent in 1988 to below 10 percent in 1994 (before devaluation) was________A) Thailand.B) Mexico.C) The Philippines.D) Indonesia.

Q: Two reasons for an industrialized country to adopt an exchange-rate targeting regime are if the country ________ conduct successful monetary policy on its own, and if the country wants to ________ integration of the domestic economy with its neighbors. A) cannot; encourage B) cannot; discourage C) can; encourage D) can; discourage

Q: Which of the following is NOT a disadvantage of exchange-rate targeting? A) It relies on a stable money-inflation relationship. B) The targeting country gives up an independent monetary policy. C) The targeting country is left open for a speculative attack. D) It can weaken the accountability of policymakers.

Q: Under a fixed exchange rate regime, if the domestic currency is initially ________, that is, ________ par, the central bank must intervene to sell the domestic currency by purchasing foreign assets. A) overvalued; below B) overvalued; above C) undervalued; below D) undervalued; above

Q: Under the Bretton Woods system, the United States was designated as the A) reserve-currency country. B) fixed-rate country. C) par-standard country. D) dollar-standard country.

Q: The World Bank is an international organization that A) promotes the growth of trade by setting rules for how tariffs and quotas are set by countries. B) makes loans to countries to finance projects such as dams and roads. C) makes loans to countries with balance of payment difficulties. D) helps developing countries that have been having difficulties in repaying their loans to come to terms with lenders in the West.

Q: The Bretton Woods agreement created the ________, which was given the task of promoting the growth of world trade by setting rules for the maintenance of fixed exchange rates and by making loans to countries that were experiencing balance of payments difficulties. A) IMF B) World Bank C) Central Settlements Bank D) Bank of International Settlements

Q: Under the Bretton Woods system, the organization assigned the task of making loans to countries that were experiencing balance of payments difficulties is known as the A) World Bank. B) International Development Association. C) International Monetary Fund. D) Federal Reserve System.

Q: The fixed exchange rate regime established at a meeting in New Hampshire in 1944 has been known as the A) General Agreement on Tariffs and Trade. B) Bretton Woods system. C) International Settlement Fund. D) Balance of Payments Compliance Accord.

Q: When gold production was low in the 1870s and 1880s, the money supply grew ________ causing ________. A) rapidly; inflation B) rapidly; disinflation C) slowly; deflation D) slowly; disinflation

Q: Under a gold standard in which one dollar could be turned in to the U.S. Treasury and exchanged for 1/20th of an ounce of gold and one German mark could be exchanged for 1/100th of an ounce of gold, an exchange rate of ________ marks to the dollar would stimulate a flow of gold from the United States to Germany. A) 7 B) 6 C) 5 D) 4

Q: Economists closely follow the current account balance because they believe it can provide information on the future movement of A) interest rates. B) gold flows. C) exchange rates. D) special drawing rights.

Q: Because it provides some indication of what is happening to U.S. claims on foreign wealth and the demand for imports and exports, the ________ is closely followed by economists wanting information on the future movement of exchange rates. A) trade balance B) capital account C) current account balance D) statistical discrepancy

Q: A current account surplus indicates that America is ________ its claims on foreign wealth, while a deficit indicates that this country is ________ its claims on foreign wealth. A) reducing; reducing B) reducing; increasing C) increasing; reducing D) increasing; increasing

Q: Suppose that the Bank of Japan buys U.S. dollar assets with yen-denominated assets. Everything else held constant, this transaction will cause ________ in the foreign assets held by the Federal Reserve and ________ in the U.S. monetary base. A) an increase; an increase B) an increase; a decrease C) a decrease; an increase D) a decrease; a decrease

Q: A central bank ________ of domestic currency and corresponding ________ of foreign assets in the foreign exchange market leads to an equal increase in its international reserves and the monetary base, everything else held constant. A) sale; purchase B) sale; sale C) purchase; sale D) purchase; purchase

Q: A central bank ________ of domestic currency and corresponding ________ of foreign assets in the foreign exchange market leads to an equal decline in its international reserves and the monetary base, everything else held constant. A) sale; purchase B) sale; sale C) purchase; sale D) purchase; purchase

Q: According to the interest parity condition, if the domestic interest rate is 10 percent and the foreign interest rate is 12 percent, then the expected ________ of the foreign currency must be ________ percent.A) appreciation; 4B) appreciation; 2C) depreciation; 2D) depreciation; 4

Q: According to the interest parity condition, if the domestic interest rate is 12 percent and the foreign interest rate is 10 percent, then the expected ________ of the foreign currency must be ________ percent. A. appreciation; 4 B. appreciation; 2 C. depreciation; 2 D. depreciation; 4

Q: In a world with few impediments to capital mobility, the domestic interest rate equals the sum of the foreign interest rate and the expected depreciation of the domestic currency, a situation known as the A. interest parity condition. B. purchasing power parity condition. C. exchange rate parity condition. D. foreign asset parity condition.

Q: The expected return on dollar deposits in terms of foreign currency can be written as the ________ of the interest rate on dollar deposits and the expected appreciation of the dollar. A. product B. ratio C. sum D. difference

Q: With a 10 percent interest rate on dollar deposits, and an expected appreciation of 7 percent over the coming year, the expected return on dollar deposits in terms of the dollar is A. 3 percent. B. 10 percent. C. 13.5 percent. D. 17 percent.

Q: With a 10 percent interest rate on dollar deposits, and an expected appreciation of 7 percent over the coming year, the expected return on dollar deposits in terms of the foreign currency is A. 3 percent. B. 10 percent. C. 13.5 percent. D. 17 percent.

Q: If the interest rate on euro-denominated assets is 13 percent and it is 15 percent on peso-denominated assets, and if the euro is expected to appreciate at a 4 percent rate, for Francois the Frenchman the expected rate of return on peso-denominated assets is A. 11 percent. B. 15 percent. C. 17 percent. D. 19 percent.

Q: If the interest rate on euro-denominated assets is 13 percent and it is 15 percent on peso-denominated assets, and if the euro is expected to appreciate at a 4 percent rate, for Manuel the Mexican the expected rate of return on euro-denominated assets is A. 11 percent. B. 13 percent. C. 17 percent. D. 19 percent.

Q: ________ in the foreign interest rate causes the demand for domestic assets to shift to the right and the domestic currency to ________, everything else held constant. A. An increase; appreciate B. An increase; depreciate C. A decrease; appreciate D. A decrease; depreciate

Q: ________ in the foreign interest rate causes the demand for domestic assets to increase and the domestic currency to ________, everything else held constant. A. An increase; appreciate B. An increase; depreciate C. A decrease; appreciate D. A decrease; depreciate

Q: A decrease in the foreign interest rate causes the demand for domestic assets to shift to the ________ and the domestic currency to ________, everything else held constant. A. right; appreciate B. right; depreciate C. left; appreciate D. left; depreciate

Q: A decrease in the foreign interest rate causes the demand for domestic assets to ________ and the domestic currency to ________, everything else held constant. A. increase; appreciate B. increase; depreciate C. decrease; appreciate D. decrease; depreciate

Q: An increase in the foreign interest rate causes the demand for domestic assets to shift to the ________ and the domestic currency to ________, everything else held constant. A. right; appreciate B. right; depreciate C. left; appreciate D. left; depreciate

Q: An increase in the foreign interest rate causes the demand for domestic assets to ________ and the domestic currency to ________, everything else held constant. A. increase; appreciate B. increase; depreciate C. decrease; appreciate D. decrease; depreciate

Q: Suppose that the Federal Reserve conducts an open market sale. Everything else held constant, this will cause the demand for U.S. assets to ________ and the U.S. dollar will ________. A. increase; appreciate B. increase; depreciate C. decrease; appreciate D. decrease; depreciate

Q: Suppose that the Federal Reserve enacts expansionary policy. Everything else held constant, this will cause the demand for U.S. assets to ________ and the U.S. dollar to ________. A. increase; appreciate B. decrease; appreciate C. increase; depreciate D. decrease; depreciate

Q: ________ in the domestic interest rate causes the demand for domestic assets to shift to the ________ and the domestic currency to depreciate, everything else held constant. A. An increase; right B. An increase; left C. A decrease; right D. A decrease; left

Q: ________ in the domestic interest rate causes the demand for domestic assets to ________ and the domestic currency to depreciate, everything else held constant. A. An increase; increase B. An increase; decrease C. A decrease; increase D. A decrease; decrease

Q: ________ in the domestic interest rate causes the demand for domestic assets to shift to the ________ and the domestic currency to appreciate, everything else held constant. A. An increase; right B. An increase; left C. A decrease; right D. A decrease; left

Q: When Americans or foreigners expect the return on dollar assets to be high relative to the return on foreign assets, there is a ________ demand for dollar assets and a correspondingly ________ demand for foreign assets. A. higher; higher B. higher; lower C. lower; higher D. lower; lower

Q: When Americans or foreigners expect the return on ________ assets to be high relative to the return on ________ assets, there is a ________ demand for dollar assets, everything else held constant. A. dollar; foreign; constant B. dollar; foreign; higher C. foreign; dollar; higher D. foreign; dollar; constant

Q: When Americans or foreigners expect the return on ________ assets to be high relative to the return on ________ assets, there is a higher demand for dollar assets and a correspondingly lower demand for foreign assets. A. dollar; dollar B. dollar; foreign C. foreign; dollar D. foreign; foreign

Q: As the relative expected return on dollar assets increases, foreigners will want to hold more ________ assets and less ________ assets, everything else held constant. A. foreign; foreign B. foreign; dollar C. dollar; foreign D. dollar; dollar

Q: The theory of portfolio choice suggests that the most important factor affecting the demand for domestic and foreign assets is the ________ on these assets relative to one another. A. interest rate B. risk C. expected return D. liquidity

Q: The ________ suggests that the most important factor affecting the demand for domestic and foreign assets is the expected return on domestic assets relative to foreign assets. A. theory of portfolio choice B. law of one price C. interest parity condition D. theory of foreign capital mobility

Q: The theory of portfolio choice suggests that the most important factor affecting the demand for domestic and foreign assets is A. the level of trade and capital flows. B. the expected return on these assets relative to one another. C. the liquidity of these assets relative to one another. D. the riskiness of these assets relative to one another.