6- If a percentage decrease in money supply is followed by a proportional percen
ID: 1224569 • Letter: 6
Question
6- If a percentage decrease in money supply is followed by a proportional percentage decrease in prices and output, this means that:
a. the velocity of money is constant.
b. the economy is in a recession.
c. the velocity of money has fallen.
d. real GDP is constant.
e. the economy is not at maximum capacity
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7-The supply curve of U.S. dollars in the foreign exchange market is:
a. downward-sloping because it is negatively related to U.S. exports.
b. downward-sloping because it is negatively related to U.S. imports.
c. upward-sloping because it is positively related to U.S. exports.
d. upward-sloping because it is positively related to U.S. imports.
e. horizontal because it is unrelated to foreign demand for U.S. goods and services
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8- To keep the U.S. dollar from depreciating against the euro, the U.S. Federal Reserve must:
a. buy euros and sell U.S. dollars.
b. buy both euros and U.S. dollars.
c. sell euros and buy U.S. dollars.
d. sell both euros and U.S. dollars.
e. buy U.S. government bonds
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9-The desire to keep assets in cash to take advantage of favorable changes in the value of non-cash assets is called the:
a. speculative demand for money.
b. wealth demand for money.
c. risk interest in money.
d. precautionary demand for money.
e. transactions demand for money.
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10- A leftward shift in the money demand function would result from:
a. a decrease in the money supply.
b. a decrease in the price level.
c. an increase in real income.
d. a decrease in the interest rate.
e. an increase in the interest rate
Explanation / Answer
6. a. Velocity of money is constant.
[Assumption of the quantity theory is that when V (velocity) is constant, changes in M (money supply) are associated with proportional changes in PY (price and output)]
7. d. upward-sloping because it is positively related to U.S. imports.
(The supply of a currency in foreign exchange market is determined by the domestic demand for imports from abroad.)
8. b. buy both euros and U.S. dollars.
(when the exchange rate is falling, the central bank should buy its currency, which lowers its holdings in international reserves and its monetary base)
9. a. speculative demand for money.
10. a. a decrease in the money supply.
(when the quantity of money demanded, the price of money decreases causing the demand curve to shift inward)
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