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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. If the money supply is $20 trillion and velocity is 2, then nominal GDP is
2. In a liquidity trap, monetary policy has ________ effect on aggregate spending because a change in the money supply has ________ effect on interest rates.
3. For the classical economists, the quantity theory of money provided an explanation of movements in the price level. Movements in the price level result
4. Friedmanʹs argument that competition among banks will tend to keep the difference between the return on bonds and money relatively constant implies that changes in ________ will have________ on the demand for money.
5. Evidence suggests that a liquidity trap is possible when ________.
6. 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.
7. According to the quantity theory of money demand,
8. Keynesʹs liquidity preference theory indicates that the demand for money
9. The Baumol-Tobin analysis suggests that
10. Keynes hypothesized that the transactions component of money demand was primarily determined by the level of
11. Since the elimination of interest rate ceilings on deposits, the implicit interest rate on money more closely approaches bond interest rates. This suggests that changes in interest rates will
12. The Baumol-Tobin analysis suggests that a decrease in the brokerage fee for buying and selling bonds will cause the demand for money to ________ and the demand for bonds to ________.
13. If nominal GDP is $10 trillion, and the money supply is $2 trillion, velocity is
14. If people expect nominal interest rates to be higher in the future, the expected return to bonds________, and the demand for money ________.
15. Keynesʹs model of the demand for money suggests that velocity is ________ related to ________.
16. 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.
17. The reason that economists are so interested in the stability of velocity is because if the demand for money is not stable, then steady growth of the money supply
18. 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
19. In Friedmanʹs modern quantity theory, the implied formula for velocity is
20. If nominal GDP is $8 trillion, and the money supply is $2 trillion, velocity is
21. If the money supply is $600 and nominal income is $3,000, the velocity of money is
22. Keynesʹs theory of the demand for money implies that velocity is
23. Keynes hypothesized that the precautionary component of money demand was primarily determined by the level of
24. Keynes argued that the transactions component of the demand for money was primarily determined by the level of peopleʹs ________, which he believed were proportional to ________.
25. In the Baumol-Tobin analysis of the demand for money, either an increase in ________ or an increase in ________ increases money demand.

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