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Student Centre Money, Banking and Financial Institutions
Third Edition
Pierre Siklos

Student Centre

Chapter 12: The Demand for Money

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    Multiple Choice Quiz

    12-1. The price purchasing power of money is defined as

        a. 1/ CPI.
        b. 1 / Nominal GDP.
        c. 1/ Prices.
        d. 1/ Real GDP.

    12-2. Real balances are defined as

        a. the change in the money stock divided by GDP
        b. the change in the money stock divided by the price level
        c. the change in the money stock divided by the CPI
        d. the money stock divided a price index.

    12-3. The relevant variables in the demand for money function are

        a. consumption and GDP
        b. consumption and investments
        c. consumption and savings
        d. consumption and nominal interest rates.

    12-4. A _______ in consumption and a _________ in the opportunity costs of holding money will lead to an increase in the demand for money.

        a. rise, rise
        b. rise, fall
        c. fall, fall
        d. fall rise

    12-5. A rise in expected inflation will lead people to _________ their holdings of money.

        a. reduce
        b. increase
        c. holdings of money will remain unchanged.
        d. sometimes increase their holdings only if interest rates increase.

    12-6. If a person is suffering from money illusion when prices increase by 5% then he or she also believes that

        a. a cash increase of 5% is required to maintain their purchasing power.
        b. a cash increase of less than 5% is required to maintain their purchasing power.
        c. a cash increase of more than 5% is required to maintain their purchasing power.
        d. money is frivolous.

    12-7. Assuming a constant rate of spending and a balance of $ at the end of the month, the Tobin-Baumol optimal cash management model predicts that an individual with a cash holding at the beginning of the month of $4,000 will hold, on average, during a given month _______ dollars.

        a. $1000
        b. $2000
        c. $3000
        d. $4000

    12-8. According to the Tobin-Baumol model, if an individual's monthly nominal income is $4,000, but he is paid on a two-week basis, then his average amount of dollars held during this two-week period is

        a. $1000
        b. $2000
        c. $3000
        d. $4000

    12-9. According to the Tobin-Baumol model, if an individual's monthly nominal income is $4,000 with half that amount going to pay down is credit card bill , and he is paid on a two-week basis, then his average amount of dollars held during this two-week period is

        a. $250
        b. $500
        c. $1000
        d. $2000

    12-10. Determining the optimal level of cash holdings for, individuals will help in studying how

        a. the demand for money is affected by changes in GDP.
        b. the demand for money is affected by consumption.
        c. the demand for money is affected by inflation.
        d. the demand for money reacts to changes in the supply of money.

    12-11. From the information in number 7, if the monthly interest rate is 1%, what is the amount of interest lost by holding money in the form of cash given 5 transactions?

        a. $2
        b. $3
        c. $4
        d. $5

    12-12. From number 11, what is the value of the interest foregone if the individual decides to make one additional transaction a month?

        a. $0.50
        b. $0.67
        c. $0,80
        d. $1.00

    12-13. What is the marginal cost of holding money in number 12)?

        a. $0.50
        b. $0.67
        c. $0,80
        d. $1.00

    12-14. From 12), what is the optimal number of transactions?

        a. 2
        b. 3
        c. 4
        d. 5

    12-15. What is the optimal demand for money from 12?

        a. $100
        b. $200
        c. $300
        d. $400

    12-16. According to the Baumol-Tobin model, higher inflation will ________ the cost of holding idle cash and increase the number of trips to the bank will __________.

        a. decrease, decrease.
        b. decrease, increase
        c. increase, increase.
        d. increase, decrease.

    12-17. According to the Quantity Theory of money, if the stock of money is $1,000 billion in the year 2000, the velocity of money is equal to 6, and the price level is equal to 120, then the value of nominal income:

        a. $6,000 billion
        b. $5,000 billion
        c. $4,000 billion
        d. $3,000 billion

    12-18. Which of the following is not a Baumol-Tobin model of the demand for money?

        a. Md= (b/2)1/2 P1/2 y1/2R-1/2
        b. Md= [(b/2) P y]1/2 (1/R1/2)
        c. Md= (b/2)0.5 P0.5 y0.5 R-0.5
        d. Md= (b/2)1/2 P1/2 y1/2R1/2

    12-19. The velocity of circulation can be defined as

        a. the number of times a given quantity of money turns over to produce a given level of spending in the economy.
        b. The volume of purchased goods in the economy in a given period of time.
        c. The dollar value of the amount of money in the economy.
        d. The number of times a currency is goes through the banking system

    12-20. Md= the quantity demanded of money, Ms=the quantity of money in circulation, V=the velocity of circulation, P= the price level, Y= the nominal GNP, and y= the real GNP. In its simplest form, the quantity theory of money is given by:

        a. MdV=Py
        b. Md/P=1/Vy
        c. MsV=Py
        d. Ms/P=1/VY



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