Problem Set 8

Problem Set 8 Econ 333 (01) Summer 2002 (Dr. Tin-Chun Lin)

1. The quantity theory of money is a theory of (A) How the money supply is determined. (B) How interest rates are determined. (C) How the nominal value of aggregate income is determined. (D) All of the above. (Answer: (C))

2. 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. (Answer: (A))

3. 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 fall by 50 percent. (D) Nominal income doubles. (Answer: (D))

4. 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) Both (A) and (B) of the above are correct. (Answer: (C))

5. If the money supply is 500 and nominal income is 3000, the velocity of money is (A) 60 (B) 6 (C) 50 (D) 5 (E) 30 (Answer: (B))

6. In the Cambridge approach to the demand for money, the Cambridge k is (A) Influenced by expected returns on assets that function as stores of wealth and can therefore fluctuate in the short run. (B) A constant in the short run, but can fluctuate in the long run. (C) Influenced solely by technological factors and can therefore fluctuate in the short run. (D) Influenced solely by technological factors so that it does not fluctuate in the short run. (Answer: (A))

7. Keynes’s liquidity preference theory indicates that the demand for money (A) Is purely a function of income, and interest rates have no effect on the demand for money. (B) Is purely a function of interest rates, and income has no effect on the demand for money. (C) Is both a function of income and interest rates. (D) Is both a function of government spending and income. (Answer: (C))

8. The money supply M has been growing at 10 percent per year, and nominal GDP PY has been growing at 20 percent per year. The data are as follows (in billions of dollars):

1998 1999 2000 M 100 110 121 PY 1000 1200 1440

Calculate the velocity in each year. At what rate is velocity growing? (Answer: Velocity is approximately 10 in 1995, 11 in 1996, and 12 in 1997. The rate of velocity growth is approximately 10 % per year.)

9. What happens to nominal GDP if the money supply grows by 20 percent but velocity declines by 30 percent? (Answer: Nominal GDP declines by approximately 10 percent)

10. Keynes’s model of the demand for money suggests that velocity is (A) Constant. (B) Positively related to interest rates. (C) Negatively related to interest rates. (D) Positively related to bond values. (E) None of the above. (Answer: (B))