Practice Questions on Money Market –

Please consult and do more questions in the text book

1. If the quantity of money demanded exceeds the money supply, what will the interest
rate do?
A) Rise, causing people to hold less money.
B) Fall, causing people to hold less money.
C) Rise, causing people to hold more money.
D) Fall, causing people to hold more money.
E) Remain unchanged, but the demand for money would decrease.

2. When can we be certain that the quantity of money demanded will decrease?
A) When nominal G0DP decreases and the interest rate increases.
B) When nominal GDP increases and the interest rate increases.
C) When nominal GDP decreases and the interest rate decreases.
D) When nominal GDP increases and the interest rate decreases.

3. In which direction will the transaction demand for money curve shift?
A) Right when nominal GDP increases. D) Right when interest rate increases.
B) Left when nominal GDP increases. E) Left when the interest rate decreases.
C) Right when nominal GDP decreases.

4. What is the relationship between the price of government bonds and the rate of return
received by bond-holders?
A) They are directly related.
B) They are inversely related.
C) They are unrelated.
D) They are independent of Bank of Canada open-market operations.
E) They are both dependent on the level of investment.

Use the following to answer questions: Below is some data concerning the money market.

Rate of Interest Asset Demand for Money National income

4% $75 $740
5% 70 720
6% 65 700
7% 60 680
8% 55 660

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 5. Refer to the information above to answer this question. If the transactions demand for
money is 10 percent of national income and the supply of money is $135 then what
would be the equilibrium interest rate?
A) 4%. B) 5%. C) 6%. D) 7%. E) 8%.

6. Refer to the information above to answer this question. If equilibrium national income is
$680 and the transaction demand for money is 10 percent of national income and the
equilibrium interest rate is 7 percent then what is the supply of money?
A) $149. B) $142. C) $135. D) $128. E) $121.

7. Refer to the information above to answer this question. If the transaction demand for
money is 10 percent of equilibrium national income which is 700 and the equilibrium
interest rate is 6 percent then which of the following is true?
A) The supply of money must be $142.
B) The transactions demand for money must be $72.
C) The supply of money must be $149.
D) The supply of money must be $135.

8. Explain how an increase in the price level affects the aggregate quantity demanded.
A) It causes an increase in the demand for money resulting in an increase in the
interest rate and a decrease in investment spending.
B) It causes a decrease in the demand for money resulting in an increase in the
interest rate and a decrease in investment spending.
C) It causes a decrease in the demand for money resulting in a decrease in the interest
rate and a decrease in investment spending.
D) It causes a decrease in the demand for money resulting in an increase in the
interest rate and an increase in investment spending.

9. Which of the following is true regarding the quantity of asset demand for money?
A) It varies directly with the level of nominal GDP.
B) It varies directly with the rate of interest.
C) It varies inversely with the level of nominal GDP.
D) It varies inversely with the rate of interest.
E) It is not related to either the rate of interest or the level of nominal GDP.

10. What can cause the demand for money curve to shift to the left?
A) If the interest rate increases. D) If nominal GDP decreases.
B) If the interest rate decreases. E) If the price level increases.
C) If nominal GDP increases.

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 11. Which of the following statements is correct?
A) An increase in prices will shift the transactions demand curve for money to the
right but leave the total money demand curve unchanged.
B) A decrease in prices will shift both the transactions demand and the total money
demand curves to the left.
C) A fall in real GDP will shift both the transactions demand and the total money
demand curve to the right.
D) A decline in real GDP will shift the transactions demand curve to the left but
leave the total money demand curve unchanged.

Use the following to answer questions -:

12. Refer to the graph above to answer this question. How will people react if the interest
rate is 3 percent?
A) They will sell bonds which will cause bond prices to fall and the interest rate to

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 rise.
B) They will buy bonds which will cause bond prices to fall and the interest rate to
rise.
C) They will sell bonds which will cause bond prices to rise and the interest rate to
rise.
D) They will buy bonds which will cause bond prices to rise but have an uncertain
effect upon the interest rate.

13. Refer to the graph above to answer this question. If the interest rate is 8 percent what
will people do?
A) Sell bonds which will cause bond prices to fall and the interest rate to fall.
B) Buy bonds which will cause bond prices to rise and the interest rate to fall.
C) Have insufficient liquidity which will cause them to reduce their spending on
consumer goods.
D) Buy bonds which will cause bond prices to fall and the interest rate to rise.

14. Refer to the graph above to answer this question. Which curve represents the
transactions demand for money?
A) MD1. B) MD2. C) MD3. D) MS. E) None of the above.

15. Refer to the graph above to answer this question. Which curve represents the total
demand for money?
A) MD1. B) MD2. C) MD3. D) MS. E) None of the above.

16. Refer to the graph above to answer this question. Suppose that the economy is in
equilibrium and each dollar held for transactions purposes is spent on average four times
per year, what can we infer from this?
A) That nominal GDP is $800. D) That nominal GDP is $400.
B) That real GDP is $1000. E) None of the above.
C) That the money supply is $800.

17. Refer to the above graph above to answer this question. What will happen if the Bank of
Canada increases the supply of money?
A) The MD3 curve would shift right and the equilibrium interest rate will rise.
B) The MD3 curve would shift right and the equilibrium interest rate will fall.
C) The MS curve would shift left and the equilibrium interest rate will fall.
D) The MS curve would shift right and the equilibrium interest rate will fall.
E) The MS curve would shift right and the equilibrium interest rate will rise.

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18. According to the Keynesian transmission process, what will be the effect of an decrease
in the money supply?
A) An increase in the interest rate, an increase in investment spending, and an
increase in GDP.
B) An increase in the interest rate, an increase in investment spending, and a decrease
in GDP.
C) An increase in the interest rate, a decrease in investment spending, and a decrease
in GDP.
D) A decrease in the interest rate, a increase in investment spending, and an increase
in GDP.
E) A decrease in the interest rate, a decrease in investment spending, and a decrease
in GDP.

19. What will an increase in the money supply tend to do?

A) Increase interest rates and lower the equilibrium GDP.
B) Increase interest rates and increase the equilibrium GDP.
C) Lower interest rates and increase the equilibrium GDP.
D) Lower interest rates and lower the equilibrium GDP.
E) None of the above.

20. According to the equation of exchange, if V is constant, and the economy is at full
employment, what would a 5 percent increase in the money supply do?
A) It will cause P to increase by less than 5%.
B) It will cause P to increase by more than 5%.
C) It will cause P to increase by 5%.
D) It will cause P to decrease by 5%.
E) It will not affect P.

21. What does the term transactions demand for money refer to?
A) The demand for money by the Bank of Canada in order to settle international
transactions.
B) The demand for money by the public in order to effect transactions.
C) The desire by the public to receive income in the form of money.
D) The demand for money by the public in order to make financial investments.

22. Which of the following is inversely related to the interest rate?

A) The velocity of money.
B) The quantity of asset money demanded.
C) The level of prices.
D) The quantity of transactions money demanded.
E) The level of savings.

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23. The asset demand for money is most closely related to which function of money?
A) The unit of account. D) The unit of value.
B) The medium of exchange. E) The value in use.
C) The store of wealth.

24. On a diagram with the interest rate on the vertical axis and the quantity of money
demanded on the horizontal axis, how can the total demand for money be obtained?
A) By adding the transactions and the asset demand for money horizontally.
B) By subtracting the transactions demand from the asset demand for money
vertically.
C) By subtracting the asset demand from the transactions demand for money
horizontally.
D) By adding the transactions and the asset demand for money vertically.
E) The asset and transaction demands are unrelated and therefore cannot be added or
subtracted.

25. How is the equilibrium rate of interest in the money market determined?
A) By the intersection of the supply of money and the asset demand for money.
B) By the intersection of the supply of money and the transactions demand for
money.
C) By the intersection of the supply of money and the total demand for money.
D) By the intersection of aggregate expenditures and the total demand for money.
E) None of the above.

26. If the money supply exceeds the quantity of money demanded, what will interest rate
do?
A) Rise, causing people to hold less money.
B) Fall, causing people to hold less money.
C) Rise, causing people to hold more money.
D) Fall, causing people to hold more money.
E) Remain unchanged, but the demand for money would increase.

27. If the amount of money in circulation is $140 billion and the nominal GDP of the
economy is $840 billion, then which of the following is true?
A) The circulation period of money must be six months.
B) The velocity of money is 2.
C) The average price per final good sold is $6.
D) The velocity of money is 6.
E) The money multiplier must be 2.

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28. According to monetarists, how does a change in the money supply affect the economy?
A) By changing the velocity of the money which in turn changes the nominal GDP.
B) By changing the rate of interest which in turn changes nominal GDP.
C) By changing investment which in turn changes nominal GDP.
D) By changing aggregate expenditures which in turn changes nominal GDP.
E) By changing the money multiplier which in turn changes nominal GDP.

29. If M is $50, P is $2, and Q is $250, what is the result?

A) V must be 4.
B) V must be 10.
C) V cannot be determined.
D) V must be 2.5.
E) Aggregate expenditures will be $12,500.

30. In a full-employment economy a rise in M could cause inflation. Under what

circumstance will this not happen?
A) If real GDP falls by the same proportion.
B) If real GDP increases by the same proportion.
C) If tax reductions accompany the increase in the money supply.
D) If the velocity of money falls.
E) If the demand for money increases by the same amount.

31. According to monetarists, what would be the effect of a sudden doubling of the supply
of money?
A) It would decrease real GDP.
B) It would decrease nominal and real GDP.
C) It would increase nominal GDP.
D) It would increase nominal GDP and lower prices.

32. What is meant by the velocity of money?

A) The number of times per year that each unit of currency is used before it is
recalled by The Canadian Mint.
B) The number of times per year that the average unit of currency is spent buying
final goods and services.
C) The money supply divided by the level of GDP.
D) The rate at which M1 changes into M2 or M3.

33. Assume that the demand for money equals the supply of money of $80 billion and that
the nominal GDP is $400 billion. According to the monetarist view, by how much will
an increase in the money supply of $5 billion increase the nominal GDP?
A) By $30 billion. D) By $10 billion.

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 B) By $25 billion. E) By zero.
C) By $20 billion.

34. Suppose that an economy is experiencing an annual growth of real GDP of 5 percent,
and the velocity of money is constant. In order to maintain price level stability what
needs to occur?
A) Taxes must be increased by 5 percent, and/or government spending reduced by
5%.
B) A budget deficit of 5% would be required.
C) The money supply must be increased by 5% per year.
D) The money supply must be increased by more than 5% per year.
E) The money supply should be decreased by 5% per year.

35. If real GDP is $600 billion, the price level is 1.2 and the velocity of money is 5, then
what is the money supply?
A) $100 billion.
B) $3,600 billion.
C) $144 billion.
D) $2,500.
E) It cannot be determined from the information.

36. According to the Keynesian transmission process, which of the following will increase
due to an decrease in the money supply?
A) Interest rates. D) Aggregate demand.
B) The price level. E) None of the above.
C) Investment.

37. Which of the following is true, according to monetarists?

A) Changes in the money supply have no effect on real variables.
B) The velocity of money increases as real GDP increases.
C) The total demand for money equals the asset demand for money.
D) Individuals hold idle balances for rational reasons.
E) If the economy is at full employment, increasing the money supply will increase
the price level.

38. In which direction will the transaction demand for money curve shift?
A) Right when nominal GDP increases. D) Right when interest rate increases.
B) Left when nominal GDP increases. E) Left when the interest rate decreases.
C) Right when nominal GDP decreases.

39. The asset demand for money is most closely related to which function of money?
A) The unit of account. D) The unit of value.

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 B) The medium of exchange. E) The value in use.
C) The store of wealth.

40. Which of the following is true regarding the opportunity cost of holding money?
A) It varies directly with the rate of interest.
B) It varies inversely with the rate of interest.
C) It varies inversely with nominal GDP.
D) It varies directly with the stock of wealth.
E) It is zero because money is not an economic resource.

41. Suppose that money GDP is $500 billion and, on average, each dollar is spent ten times
per year, what is the amount of money demanded for transactions purposes?
A) It will be $50 billion.
B) It will be $500 billion.
C) It will be $5000 billion.
D) It will be $1000 billion.
E) It cannot be determined from the information given.

42. If the money supply exceeds the quantity of money demanded, what will interest rate
do?
A) Rise, causing people to hold less money.
B) Fall, causing people to hold less money.
C) Rise, causing people to hold more money.
D) Fall, causing people to hold more money.
E) Remain unchanged, but the demand for money would increase.

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Use the following to answer questions:

43. Refer to the graph above to answer this question. What is the effect of a decrease in the
money supply of 40?
A) A decrease in the interest rate of 3 percentage points.
B) A decrease in the interest rate of 6 percentage points.
C) An increase in investment spending of $20.
D) A decrease in investment spending of $20.
E) An increase in aggregate demand of $40.

44. Refer to the graph above to answer this question. Suppose that the equilibrium interest
rate is 6 percent. What fraction of real GDP does the transactions demand represent?
A) 6 %.
B) 10%.
C) 12.5%.
D) 20%.
E) Cannot be determined from this information.

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 45. In the Keynesian transmission process what follows after an increase in the money
supply has caused a fall in the interest rate?
A) GDP falls. C) Investment spending rises.
B) Investment spending falls. D) None of the above.

ANSWER KEY

1A 11 B 21 B 31 C 41 A
2A 12 A 22 B 32 B 42 D
3A 13 B 23 C 33 B 43 D
4B 14 A 24 A 34 C 44 E
5C 15 C 25 C 35 C 45 C
6D 16 A 26 D 36 A
7D 17 D 27 D 37 E
8A 18 C 28 D 38 A
9D 19 C 29 B 39 C
10 A 20 C 30 D 40 A

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