1.

People who expect a very high inflation rate

may

a. Prefer to hold goods instead of money

b. Decrease the speed with which they spend their
money, thereby decreasing velocity
c. Shift their money from time deposits to demand
deposits
d. Increase their demand for real money balances
in order to be able to purchase higher-priced goods
later
e. None of the above
2. Advantages of holding money rather than less
liquid assets such as bonds or stocks include

a. The ability to engage in day-to-day transactions

with ease and convenience
b. The ability to take advantage of unforeseen
opportunities to make potentially profitable
purchases
c. The lowering of overall portfolio risk
d. Protection against loss in the market values of
other assets in periods of rising interest rates
e. All of the above
3. According to the Baumol-Tobin transaction
demand model, the amount of money balances
held should increase as

a. The interest rate increases

b. The level of income decreases
c. The cost of money transactions increases
d. The cost of illiquidity increases
e. None of the above
4. According to the Baumol-Tobin transaction
demand model, money demand for transactions

a. Depends only on the level of income

b. Depends only on the cost of illiquidity
c. Varies inversely with both the interest rate and
the level of income
d. Increases as the interest rate decreases or
income increases
e. Decreases as the cost of illiquidity increases
5. If interest rates are currently very high and you expect
them to go down soon, you will most likely

a. Sell your bonds now, while their yield is high and they
are more marketable
b. Want to hold more money now to undertake more
transactions since you expect economic activity to
increase
c. Hold more money now, so you can buy more bonds
later as soon as interest rates have dropped
d. Hold on to your bonds for now but expect to sell
some of them later once interest rates have declined
e. Switch from holding long-term bonds to holding short-
term bonds
6. If the income elasticity of money demand is less than 1,
then

a. The income velocity of money will increase as the

level of income increases
b. The income velocity of money will decrease as the level
of income increases
c. The income velocity of money will remain constant over
time
d. The income velocity of money will increase with an
increase in money demand
e. An increase in income is always less than the resulting
increase in money demand
7. If restrictive fiscal policy is combined with
expansionary monetary policy to reduce interest
rates without changing income, then

a. The income velocity of money should not change

b. The income velocity of money should decrease
c. The demand for money should not change
d. The demand for money should decrease
e. Both money demand and velocity of M1 should
decrease
8. Assume the economy goes into a recession. We
should expect that

a. The income velocity of money will decrease

b. The income velocity of money will increase
c. The income velocity of money will remain
unaffected
d. Money demand and the income velocity of
money will both increase
e. Money demand and the income velocity of
money will both decrease
9. Assume that interest rates drop and GDP increases as
a result of expansionary monetary policy. What should
happen to the demand for real money balances?

a. It should increase
b. It should decrease since interest rates will decrease
c. It will remain unaffected since income will go up but
the interest rate will go down
d. It will remain unaffected since the income velocity of
money does not change
e. We can't tell for sure since we do not know what will
happen to the income velocity of money
10. According to the quantity theory of money,
an increase in the money supply will result in

a. An increase in nominal GDP

b. An increase in velocity of equal magnitude
c. A decrease in velocity of equal magnitude
d. A decrease in money demand
e. A proportional increase in real GDP
11. If real GDP has grown at a rate of 3%, but
nominal money supply and the price level have
both grown by 5%, then the income velocity of
money must have

a. Stayed constant
b. Decreased by 2%
c. Decreased by 3%
d. Increased by 3%
e. Increased by 8%
12. Assume nominal money supply grows by 6%
and real GDP grows by 4%. We can conclude
that the rate of inflation is about

a. +6%
b. +2%
c. +6% minus the percentage change in velocity
d. +2% plus the percentage change in velocity
e. +2% minus the percentage change in velocity
13. If income taxes are lowered, we can expect
that the income velocity of money will

a. Increase due to an increase in income and

interest rates
b. Decrease due to an increase in saving and
money supply
c. Decrease since people will save more
d. Remain fairly stable since both income and
prices will increase
e. Decrease since money supply will increase