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Student Name
Time: 25 Minutes
_________________________
money demand depends on permanent income, which is more stable than actual income.
money demand depends on actual income, which is more stable than permanent income.
velocity depends upon interest rates, which are stable over the business cycle.
velocity depends upon interest rates, which move procyclically.
velocity depends upon the money supply, which is controlled by the Federal Reserve
System.
Answer: A
5.
6.
The more sensitive is the demand for money to interest rates, the _____ unpredictable
velocity will be, and the link between the money supply and aggregate spending will be
_____ clear.
a) more; more
b) more; less
c) less; more
d) less; less
Answer: B
According to the quantity theory of money, if the long-run economic growth rate is 2.5%,
by how much should the Fed increase the money supply if it wants inflation to be 2%?
a) 0.5%
b) 1.25%
c) 4.5%
d) 5%
Answer: C
7. If nominal money balances increase from $2 billion to $3 billion, while the price level
increases from 100 to 150, real money balances will
(a)
have increased by 50%.
(b)
have decreased by 50%.
(c)
have increased by 100%.
(d)
be unchanged.
Answer: C
8. An important difference between Keyness approach to the demand for money and Friedmans
approach is that
(a) there is no role for the opportunity cost of holding money in Friedmans theory.
(b) in Keyness theory changes in output have no effect on the demand for money.
(c) in Friedmans theory money demand responds only slightly to short-run fluctuations in
income.
(d) in Keyness theory money demand is a function of the real interest rate, rather than the
nominal interest rate.
Answer: C
9. Fluctuations in velocity indicate that
(a) changes in money holdings cannot be completely explained by changes in the price
level.
(b) changes in money holdings cannot be completely explained by changes in the volume
of transactions.
(c) the Fed will have an easier time in hitting monetary aggregate targets than in hitting
interest rate targets.
(d) inflation must be accelerating.
Answer: B
Answer: E
11. Accordingly to Friedmans Quantity Theory of Money:
a)
b)
c)
d)
e)
f)
Answer: E