Chapter 27.2

Question 1

The term “demand for money” usually refers to the
A) aggregate demand for money balances in the economy.
B) average person’s desire to hold cash.
C) cash and deposits actually held by firms.
D) sum of all desired holdings of cash.
E) sum of all desired assets, including cash, bonds, and real property.

Answer 1

A

Question 2

The opportunity cost of holding money rather than bonds is
A) the rate of interest earned on bonds.
B) the price level.
C) forgone consumption.
D) forgone liquidity.
E) zero - there is no opportunity cost of holding money.

Answer 2

A

Question 3

If a person is holding money for the purchase of goods and services, this demand for money is known as 
A) speculative demand.
B) precautionary demand.
C) transactions demand.
D) real balance demand.
E) nominal balance demand.

Answer 3

C

Question 4

The “transactions demand” for money arises from the fact that
A) there is uncertainty in the receipts of income.
B) there is uncertainty about the movement of interest rates.
C) households wish to have all their wealth in the form of money.
D) households decide to hold money in order to make purchases of goods and services.
E) households want to keep cash on had to buy bonds if bond prices drop.

Answer 4

D

Question 5

The “precautionary demand” for money arises from the
A) fear that interest rates will fall.
B) fear that interest rates will rise.
C) need to make predictable purchases of goods and services.
D) uncertainty about when some expenditures will be necessary.
E) desire to avoid paying interest on credit purchases.

Answer 5

D

Question 6

Other things being equal, the transactions demand for money tends to increase when 
A) interest rates rise.
B) interest rates stop rising.
C) national income rises.
D) national income falls.
E) the price level falls.

Answer 6

C

Question 7

Consider the demand for money. If real GDP falls, other things being equal, we can expect
A) an increase in the speculative demand for money.
B) an increase in the total demand for money.
C) a decrease in transactions demand for money.
D) an increase in transactions demand for money.
E) an increase in precautionary demand for money.

Answer 7

C

Question 8

Suppose an economic analyst suggests that investors should now hold cash instead of stocks or bonds. The analyst is probably encouraging an increase in money balances for which reason?
A) transaction demand
B) precautionary demand
C) speculative demand
D) present value demand
E) portfolio demand

Answer 8

C

Question 9

A firm that holds cash to avoid penalties associated with the late payment of bills is demonstrating which type of demand for money?
A) transactions demand
B) precautionary demand
C) speculative demand
D) present value demand
E) risk-return demand

Answer 9

B

Question 10

Among other things, people hold cash balances for which of the following reasons?
1) to meet unforeseen emergencies
2) to maximize their returns on interest-earning assets
3) to guard against the uncertainty of the timing of receipts and payments
A) 1 only
B) 2 only
C) 3 only
D) 1 and 2
E) 1 and 3

Answer 10

E

Question 11

Speculative demand for money arises from the desire by individuals and firms to hold cash balances
A) for speculative equity purchases.
B) in anticipation of changes in interest rates and bond prices.
C) to meet unforeseen business expenses.
D) in anticipation of investing in capital purchases for the firm.
E) to maintain adequate cash flow in case of inflation.

Answer 11

B

Question 12

In the basic AD/AS macro model, it is assumed that, for any given interest rate, the demand for money depends on the
A) aggregate demand for goods and services.
B) level of government spending.
C) rate of growth of real GDP.
D) level of taxes.
E) level of real GDP and the price level.

Answer 12

E

Question 13

The demand for money (MD) function defines the relationship between
A) interest rates and bond prices.
B) inflation and bond prices.
C) interest rates and financial assets.
D) the quantity of money demanded and the price level.
E) the quantity of money demanded and the rate of interest.

Answer 13

E

Question 14

Refer to Figure 27-1. A rightward shift of the money demand curve can be caused by
A) an increase in the price level.
B) a decrease in the price level.
C) a decrease in real GDP.
D) an increase in the rate of interest.
E) a decrease in the rate of interest.

Answer 14

A

Question 15

Refer to Figure 27-1. A leftward shift in the money demand curve can be caused by by
A) an increase in the rate of interest.
B) a decrease in the rate of interest.
C) an increase in the price level.
D) a decrease in real GDP.
E) an increase in real GDP.

Answer 15

D

Question 16

Refer to Figure 27-1. Given the money demand curve,  , an increase in the quantity of money demanded from   to   can be caused by
A) an increase in the price level.
B) a decrease in the price level.
C) an increase in real GDP.
D) an increase in the rate of interest.
E) a decrease in the rate of interest.

Answer 16

E

Question 17

Refer to Figure 27-1. Given the money demand curve,  , a decrease in the quantity of money demanded from   can be caused by
A) an increase in the price level.
B) a decrease in the price level.
C) an increase in real GDP.
D) an increase in the rate of interest.
E) a decrease in the rate of interest.

Answer 17

D

Question 18

If there are just two assets, bonds and money, then an excess demand for money implies
A) an excess supply of bonds.
B) an excess demand for bonds.
C) equilibrium in the bond market.
D) an indeterminate equilibrium in the bond market.
E) nothing about conditions of demand for the other financial asset.

Answer 18

A

Question 19

Assume there are just two assets, money and bonds. We can expect that an individual with a given level of wealth will
A) hold less money when bond prices rise.
B) hold more money when the current interest rate is very low.
C) not hold money as long as bonds pay a positive rate of interest.
D) hold lots of money even at very high interest rates.
E) hold less money when the current interest rate is very low.

Answer 19

B

Question 20

According to the "liquidity preference" theory of the rate of interest, if the supply of money increases, then, ceteris paribus, bond prices will
A) fall as the rate of interest rises.
B) rise as the rate of interest rises.
C) fall as the rate of interest falls.
D) rise as the rate of interest falls.
E) stay the same.

Answer 20

D

Question 21

If the general price level were to increase, other things being equal, the money demand function would
A) not be affected.
B) shift to the left.
C) shift to the right.
D) shift, but the direction of the shift cannot be predicted.
E) become steeper but not shift.

Answer 21

C

Question 22

If the annual market interest rate is 20%, the annual opportunity cost of having $50 cash in your pocket is
A) $0.
B) $2.
C) $10.
D) $50.
E) $1000.

Answer 22

C

Question 23

Suppose that at a given interest rate and money supply, all firms and households simultaneously try to add to their money balances. They do this by trying to ________, which causes an excess ________, which causes a(n) ________, and finally a(n) ________ in the interest rate.
A) sell bonds; supply of bonds; increase in the price of bonds; decrease
B) buy bonds; supply of bonds; decrease in the price of bonds; increase
C) sell bonds; demand for bonds; increase in the price of bonds; decrease
D) buy bonds; demand for bonds; increase in the price of bonds; decrease
E) sell bonds; supply of bonds; decrease in the price of bonds; increase

Answer 23

E

Question 24

Suppose that at a given interest rate and money supply, all firms and households simultaneously try to reduce their money balances. They do this by trying to ________, which causes an excess ________, which causes a(n) ________, and finally a(n) ________ in the interest rate.
A) sell bonds; supply of bonds; increase in the price of bonds; decrease
B) buy bonds; supply of bonds; decrease in the price of bonds; increase
C) sell bonds; demand for bonds; increase in the price of bonds; decrease
D) buy bonds; demand for bonds; increase in the price of bonds; decrease
E) sell bonds; supply of bonds; decrease in the price of bonds; increase

Answer 24

D

Question 25

Consider the demand for money curve. As we move up and to the left along the curve, the opportunity cost of holding money
A) is increasing, so households and firms increase their desired money holdings.
B) is increasing, so households and firms decrease their desired money holdings.
C) is declining, so households and firms decrease their desired money holdings.
D) is declining, so households and firms increase their desired money holdings.

Answer 25

B

Question 26

Ceteris paribus, a rightward shift of the money demand curve could indicate which of the following:
1) an increase in demand for bonds;
2) an increase in the price level;
3) an increase in real GDP.
A) 1 only 
B) 2 only
C) 3 only
D) 1 and 2 only
E) 2 and 3 only

Answer 26

E