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Money, Banking, and Financial Markets Practice Test: The Demand for Money
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Avg score: 33% • Most missed: “The more sensitive is the demand for money to interest rates, the ________ unpre…”
In monetary economics, the demand for money is the amount of money people want to hold in the form of cash or bank deposits. It can also refer to the demand for money in the broader sense of M2 or M3. The demand for money is a linear function that is positive in income and negative in interest rate. Some factors that can lead to a shift in the demand for money include: Real GDP, The price level, Economic expectations, Transfer costs, and Preferences.  The demand for money is different from both income and wealth.  There are three main reasons to hold money: Transactions: People need money... Show more
Money, Banking, and Financial Markets Practice Test: The Demand for Money
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25 Questions

1. The Keynesian demand for real balances can be expressed as
2. According to Milton Friedman, income declines relative to permanent income during a business cycle contraction, causing the demand for money relative to actual income to increase, thereby causing velocity to
3. If interest rates do not affect the demand for money, then velocity is ________ likely to be________.
4. If the money supply is $500 and nominal income is $4,000, the velocity of money is
5. 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
6. In Friedmanʹs modern quantity theory, velocity depends upon the ratio of
7. Keynesʹs model of the demand for money suggests that velocity is ________ related to ________.
8. According to Keynesʹs theory of liquidity preference, velocity increases when
9. Because Treasury bills pay a higher return than money and have no risk
10. Keynes hypothesized that the precautionary component of money demand was primarily determined by the level of
11. Keynes hypothesized that the transactions component of money demand was primarily determined by the level of
12. The ________ sensitive is the demand for money to interest rates, the more unpredictable velocity will be, and the link between the money supply and aggregate spending will be________ clear.
13. In the Baumol-Tobin analysis of transactions demand, scale economies imply that an increase in real income increases the quantity of money demanded ________, while an increase in the price level increases the quantity of money demanded ________.
14. Of the three motives for holding money suggested by Keynes, which did he believe to be the most sensitive to interest rates?
15. 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
16. Cutting the money supply by one-third is predicted by the quantity theory of money to cause
17. If the money supply is $600 and nominal income is $3,000, the velocity of money is
18. If nominal GDP is $10 trillion, and the money supply is $2 trillion, velocity is
19. Evidence suggests that a liquidity trap is possible when ________.
20. In a liquidity trap, monetary policy has ________ effect on aggregate spending because a change in the money supply has ________ effect on interest rates.
21. Velocity, over the business cycle, tends to
22. Because interest rates have substantial fluctuations, the ________ theory of the demand for money indicates that velocity has substantial fluctuations as well.
23. 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.
24. Evidence since 1915 indicates that velocity has
25. A central question in monetary theory is whether or to what extent the quantity of money demanded is affected by changes in ________.

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