Chapter 10 - The Demand for Money and the Price Level

Name:

True/False
Indicate whether the statement is true or false.

High powered money is commodity money like gold and silver.

If households reduce money balances, then their transactions costs go up.

If the money supply grows faster than money demand, then the price level rises.

If the interest rate increases, then the real demand for money also increases.

The neutrality of money means that one time changes in the money supply do not affect real variables.

Multiple Choice
Identify the choice that best completes the statement or answers the question.

Fiat money is money that has value because of:

a.	its intrinsic value.
b.	it is a commodity.
c.	government decree.
d.	all of the above.

Commodity money is money that has value because:

a.	of the intrinsic value of the commodity.
b.	it is legal tender.
c.	the government says so.
d.	all of the above.

If a person holds one dollar and does not lose it, then as long as the person holds that dollar they will have:

a.	the commodity value of the dollar.
b.	one dollar in currency.
c.	an interest bearing asset.
d.	all of the above.

High powered money is:

a.	money held by business for investment.
b.	total currency in circulation plus depository institutions deposits at the Federal Reserve.
c.	total currency in circulation.
d.	government bonds held by the public and depository institutions.

10.

A monetary aggregate is:

a.	high powered money.
b.	commodity money.
c.	money defined more broadly than currency.
d.	total currency in circulation plus depository institutions deposits at the Federal Reserve.

11.

US M1 money includes:

a.	currency held by the public.
b.	checkable deposits.
c.	traveler’s checks.
d.	all of the above.

12.

US M1 money includes:

a.	savings deposits.
b.	checkable deposits.
c.	time deposits.
d.	all of the above.

13.

US M1 money includes:

a.	currency, traveler’s checks and checkable deposits.
b.	checkable deposits, traveler’s checks and savings deposits.
c.	currency, checkable deposits, savings deposits.
d.	currency, time deposits, checkable deposits.

14.

US M2 money includes:

a.	currency.
b.	demand deposits
c.	small time deposits.
d.	all of the above.

15.

US M2 money includes:

a.	currency, time deposits government bonds.
b.	savings deposits, small time deposits, private bonds.
c.	checkable deposits, savings deposits, small time deposits.
d.	retail money market mutual funds, small time deposits, government bonds.

16.

Money is different from other assets like capital and bonds in that:

a.	money does not pay interest.
b.	money can be spent for purchases.
c.	capital and bonds are better long term stores of value.
d.	all of the above.

17.

Money is different from other assets like capital and bonds in that:

a.	money does not pay interest.
b.	money has intrinsic value.
c.	money is a better long term store of value.
d.	all of the above.

18.

Money is different from other assets like capital and bonds in that:

a.	money pays a higher interest rate.
b.	money can be spent for purchases.
c.	money is a better long term store of value.
d.	all of the above.

19.

Money is different from other assets like capital and bonds in that:

a.	money has intrinsic value.
b.	money pays a higher rate of interest.
c.	capital and bonds are better long term stores of value.
d.	all of the above.

20.

When households reduce their average money balances, they

a.	purchase more goods.
b.	they earn less interest.
c.	incur more opportunity costs.
d.	incur more transaction costs.

21.

If a person’s income doubles we expect their cash holding to:

a.	double.
b.	more than double.
c.	less than double.
d.	decline.

22.

Economies of scale in cash management means:

a.	at a higher income household’s hold more money as a proportion of their income.
b.	at lower incomes household’s hold more money as a proportion of their income
c.	the proportion of income held is not affected by household income.
d.	at lower income households hold less money as a proportion of their income.

23.

Real money demand does not change when:

a.	nominal GDP changes.
b.	the interest rate changes.
c.	the price level changes.
d.	all of the above.

24.

Among the source of transactions costs associated with reducing average money balances are:

a.	brokerage fees.
b.	the time spent going to the bank.
c.	the time spent going to the ATM.
d.	all of the above.

25.

Among the sources of transactions costs associated with reducing average money balances are:

a.	brokerage fees.
b.	opportunity costs.
c.	foregone interest payments.
d.	all of the above.

26.

Among the source of transactions costs associated with reducing average money balances are:

a.	foregone interest payments.
b.	the time spent going to the bank or ATM.
c.	opportunity costs.
d.	all of the above.

27.

The demand for money is:

a.	negatively related to the price level.
b.	positively related to the interest rate.
c.	positively related to real GDP.
d.	all of the above.

28.

The demand for money is:

a.	negatively related to the price level.
b.	negatively related to the interest rate.
c.	negatively related to real GDP.
d.	all of the above.

29.

The demand for money is:

a.	positively related to the price level.
b.	positively related to the interest rate.
c.	negatively related to real GDP.
d.	all of the above.

30.

The demand for money is:

a.	positively related to the price level.
b.	negatively related to the interest rate.
c.	positively related to real GDP.
d.	all of the above.

31.

When the supply of money increases, then

a.	the price level rises.
b.	the price level falls.
c.	money demand increases.
d.	money demand decreases.

32.

When the demand of money increases, then

a.	the price level rises.
b.	the price level falls.
c.	the money supply increases.
d.	the money supply decreases.

	Figure 10.1

33.

In Figure 10.1, if money demand decreases then:

a.	the equilibrium price level rises.
b.	the equilibrium prices level falls.
c.	the money supply rises.
d.	the money supply falls.

34.

In Figure 10.1, if the money supply decreases then:

a.	the equilibrium price level rises.
b.	the equilibrium price level falls.
c.	money demand increases.
d.	money demand decreases.

35.

In Figure 10.1 if the interest rate, i, were to increase, then

a.	money demand decreases and the price level increases.
b.	money demand increases and the price level decreases.
c.	the money supply and the price level would increase.
d.	the money supply and the price level would decrease.

36.

In Figure 10.1 if real GDP, Y, were to increase, then

a.	money demand decreases and the price level increases.
b.	money demand increases and the price level decreases.
c.	the money supply and the price level would increase.
d.	the money supply and the price level would decrease.

37.

In Figure 10.1 the interaction of the money supply and money demand determines:

a.	real GDP.
b.	the price level.
c.	growth rate of the economy.
d.	all of the above.

38.

In Figure 10.1 if money demand increases faster than the money supply then:

a.	the price level will rise over time.
b.	the price level will fall over time.
c.	GDP will rise over time.
d.	GDP will fall over time.

39.

In Figure 10.1 if the money supply increases faster than money demand then:

a.	the price level will rise over time.
b.	the price level will fall over time.
c.	GDP will rise over time.
d.	GDP will fall over time.

40.

In Figure 10.1, if money demand increases then:

a.	the equilibrium price level rises.
b.	the equilibrium price level falls.
c.	the money supply rises.
d.	the money supply falls.

41.

In Figure 10.1, if the money supply increases then:

a.	the equilibrium price level rises.
b.	the equilibrium price level falls.
c.	the money supply rises.
d.	the money supply falls.

42.

Real money demand is:

a.	.
b.	a function of real GDP and the interest rate.
c.	the purchasing power of money balances.
d.	all of the above.

43.

Real money demand is:

a.	money demand after taxes.
b.	a function of real GDP and the interest rate.
c.	determined by the central bank.
d.	all of the above.

44.

Real money demand is:

a.	determined by the central bank.
b.	money demand after taxes.
c.	the purchasing power of money balances.
d.	all of the above.

45.

If the money supply doubles, then

a.	real GDP doubles.
b.	real money demand doubles.
c.	the interest rate, i, doubles.
d.	none of the above.

46.

If the money supply doubles, then

a.	GDP doubles.
b.	the price level doubles.
c.	the interest rate, i, doubles.
d.	none of the above.

47.

Under price level targeting the money supply becomes:

a.	neutral.
b.	endogenous.
c.	exogenous.
d.	predetermined.

48.

During a recession,

a.	the interest rate and real GDP fall tending to cause money demand to fall.
b.	the interest rate and real GDP rise tending to cause money demand to rise.
c.	the interest rate falls tending to cause money demand to rise, but is at least partly offset by real GDP falling tending to cause money demand to fall.
d.	the interest rate rising and real GDP falling tend to cause money demand to rise.

49.

If policy makers target a specific price level, then:

a.	the money supply becomes exogenous in the model.
b.	the money supply becomes predetermined in the model.
c.	the money supply becomes endogenous in the model.
d.	the money supply becomes neutral in the model.

50.

In US data from 1954 to 2006, the price level is:

a.	procyclical as we would expect if the monetary authority does not vary the money with the business cycle.
b.	procyclical as we would expect if the monetary authority varies the money supply with the business cycle.
c.	countercyclical as we would expect if the monetary authority does not vary the money supply with the business cycle.
d.	countercyclical as we would expect if the monetary authority varies the money supply with the business cycle.

51.

Real money demand is:

a.	L(Y, i).
b.	equal to the money supply.
c.	P • L(Y, i).
d.	all of the above.

52.

Money demand and the money supply are brought into equilibrium by:

a.	real GDP adjusting.
b.	the price level adjusting.
c.	the interest rate adjusting.
d.	the real wage rate adjusting.

53.

Price level targeting implies that the monetary authority:

a.	changes the money supply to match movements in money demand.
b.	changes money demand to match movements in the money supply.
c.	changes money demand and money supply to match movements in the price level.
d.	changes money demand to match movements in the price level.

54.

The neutrality of money implies:

a.	one time changes in real variables do not affect money demand.
b.	one time changes in the money supply do not affect real variables.
c.	one time changes in nominal variables do not affect money demand.
d.	one time changes in the money supply do not affect nominal variables.

55.

If for one period the money supply increases, then:

a.	real GDP increases.
b.	the real wage increases.
c.	real capital per worker increases.
d.	none of the above.

Short Answer

56.

What is the money demand function and what is the direction of influence of the variables on money demand?

57.

Why does economizing on money balances lead to greater transactions cost?

58.

How do money demand and the money supply interact to determine the price level?

59.

What does money neutrality mean?

60.

What would happen to money demand, the money supply and the price level if there were a positive shock to production?