Chapter 19

The Demand for Money

19.1 Quantity Theory of Money

1) The quantity theory of money is a theory of how

A) the money supply is determined.
B) interest rates are determined.
C) the nominal value of aggregate income is determined.
D) the real value of aggregate income is determined.

2) Because the quantity theory of money tells us how much money is held for a given
amount of
aggregate income, it is also a theory of
A) interest-rate determination.
B) the demand for money.
C) exchange-rate determination.
D) the demand for assets.

3) The average number of times that a dollar is spent in buying the total amount of final
goods and
services produced during a given time period is known as
A) gross national product.
B) the spending multiplier.
C) the money multiplier.
D) velocity.

4) The velocity of money is

A) the average number of times that a dollar is spent in buying the total amount of final
goods and services.
B) the ratio of the money stock to high-powered money.
C) the ratio of the money stock to interest rates.
D) the average number of times a dollar is spent in buying financial assets.

5) If the money supply is $500 and nominal income is $3,000, the velocity of money is
A) 1/60.
B) 1/6.
C) 6.
D) 60.

6) If the money supply is $600 and nominal income is $3,000, the velocity of money is
A) 1/50.
B) 1/5.
C) 5.
D) 50.

7) If the money supply is $500 and nominal income is $4,000, the velocity of money is
A) 1/20.
B) 1/8.
C) 8.
D) 20.

8) If the money supply is $600 and nominal income is $3,600, the velocity of money is
A) 1/60.
B) 1/6.
C) 6.
D) 60.

9) If nominal GDP is $10 trillion, and the money supply is $2 trillion, velocity is
A) 0.2.
B) 5.
C) 10.
D) 20.

10) If nominal GDP is $8 trillion, and the money supply is $2 trillion, velocity is
A) 0.25.
B) 4.
C) 8.
D) 16.

11) If nominal GDP is $10 trillion, and velocity is 10, the money supply is
A) $1 trillion.
B) $5 trillion.
C) $10 trillion.
D) $100 trillion.

12) If the money supply is $2 trillion and velocity is 5, then nominal GDP is
A) $1 trillion.
B) $2 trillion.
C) $5 trillion.
D) $10 trillion.

13) If the money supply is $20 trillion and velocity is 2, then nominal GDP is
A) $2 trillion.
B) $10 trillion.
C) $20 trillion.
D) $40 trillion.

14) Velocity is defined as

A) P + M + Y.
B) (P × M)/Y.
C) (Y × M)/P.
D) (P × Y)/M.

15) The velocity of money is defined as

A) real GDP divided by the money supply.
B) nominal GDP divided by the money supply.
C) real GDP times the money supply.
D) nominal GDP times the money supply.

16) The equation of exchange states that the quantity of money multiplied by the number of
times
this money is spent in a given year must equal
A) nominal income.
B) real income.
C) real gross national product.
D) velocity.

17) In the equation of exchange, the concept that provides the link between M and PY is
called
A) the velocity of money.
B) aggregate demand.
C) aggregate supply.
D) the money multiplier.

18) The equation of exchange is

A) M × P = V × Y.
B) M + V = P + Y.
C) M + Y = V + P.
D) M × V = P ×Y.

19) Irving Fisher took the view that the institutional features of the economy which affect
velocity change ________ over time so that velocity will be fairly ________ in the short run.
A) rapidly; erratic
B) rapidly; stable
C) slowly; stable
D) slowly; erratic

20) In Irving Fisherʹs quantity theory of money, velocity was determined by

A) interest rates.
B) real GDP.
C) the institutions in an economy that affect individualsʹ transactions.
D) the price level.

21) The classical economistsʹ conclusion that nominal income is determined by movements
in the money supply rested on their belief that ________ could be treated as ________ in
the short run.
A) velocity; constant
B) velocity; variable
C) money; constant
D) money; variable
22) The view that velocity is constant in the short run transforms the equation of exchange
into the quantity theory of money. According to the quantity theory of money, when the
money supply
doubles
A) velocity falls by 50 percent.
B) velocity doubles.
C) nominal incomes falls by 50 percent.
D) nominal income doubles.

23) Cutting the money supply by one-third is predicted by the quantity theory of money to
cause
A) a sharp decline in real output of one-third in the short run, and a fall in the price level by
one-third in the long run.
B) a decline in real output by one-third.
C) a decline in output by one-sixth, and a decline in the price level of one-sixth.
D) a decline in the price level by one-third.

24) The classical economists believed that if the quantity of money doubled,
A) output would double.
B) prices would fall.
C) prices would double.
D) prices would remain constant.

25) The classical economistsʹ contention that prices double when the money supply doubles
is predicated on the belief that in the short run velocity is ________ and real GDP is
________.
A) constant; constant
B) constant; variable
C) variable; variable
D) variable; constant

26) For the classical economists, the quantity theory of money provided an explanation of
movements in the price level. Movements in the price level result
A) solely from changes in the quantity of money.
B) primarily from changes in the quantity of money.
C) only partially from changes in the quantity of money.
D) from changes in factors other than the quantity of money.

27) If initially the money supply is $1 trillion, velocity is 5, the price level is 1, and real GDP is
$5 trillion, an increase in the money supply to $2 trillion
A) increases real GDP to $10 trillion.
B) causes velocity to fall to 2.5.
C) increases the price level to 2.
D) increases the price level to 2 and velocity to 10.
28) If initially the money supply is $2 trillion, velocity is 5, the price level is 2, and real GDP is
$5 trillion, a fall in the money supply to $1 trillion
A) reduces real GDP to $2.5 trillion.
B) causes velocity to rise to 10.
C) decreases the price level to 1.
D) decreases the price level to 1 and decreases velocity to 2.5.

29) According to the quantity theory of money demand,

A) an increase in interest rates will cause the demand for money to fall.
B) a decrease in interest rates will cause the demand for money to increase.
C) interest rates have no effect on the demand for money.
D) an increase in money will cause the demand for money to fall.

30) Fisherʹs quantity theory of money suggests that the demand for money is purely a
function of________, and ________ no effect on the demand for money.
A) income; interest rates have
B) interest rates; income has
C) government spending; interest rates have
D) expectations; income has

31) ________ quantity theory of money suggests that the demand for money is purely a
function of
income, and interest rates have no effect on the demand for money.
A) Keynesʹs
B) Fisherʹs
C) Friedmanʹs
D) Tobinʹs

32) Irving Fisherʹs view that velocity is fairly constant in the short run transforms the
equation of
exchange into the
A) Friedmanʹs theory of income determination.
B) quantity theory of money.
C) Keynesian theory of income determination.
D) monetary theory of income determination.