Econ/341 Week 1
University of Bahrain
College of Business Administration
Department of Economics and Finance
Econ 341 - Monetary Economics
Problem Set 6 (Chapter 22)
AlShawa
1. According to the quantity theory of money, movements in the price level result
* a. solely from changes in the quantity of money. b. primarily from changes in the quantity of money. c. partially from changes in the quantity of money. d. from changes in factors other than the quantity of money.
2. Because Keynes assumed that the expected return on money was zero, he argued that a. people would never hold money. b. people would never hold money as a store of wealth.
* c. people would hold money as a store of wealth when the expected return on bonds was negative. …show more content…
changes in interest rates will have little effect on the demand for money. c. changes in income will have big impact on the demand for money. d. changes in income will have little effect on the demand for money.
8. Suppose the real money demand function is L(i, Y) = 1,000 - 1,000i + 0.2Y. Given that P = 200, Y = 2,000 and i = 10%, velocity is equal to a. 0.65 b. 0.75 c. 1.33
* d. 1.54
9. Which of the following is most likely to lead to a 1% increase in the nominal demand for money? a. Increase in real income by 0.5%. b. Decline in real income by 0.5%.
* c. Increase in the price level by 1%. d. Decline in the price level by 1%.
10. Suppose the real money demand function is L(Y, i) = 2,400 - 10,000 (r + πe) + 0.2Y. Assume MS =4,000, P = 2, Y = 5,000 and πe = 3%. The real interest rate is a. 3%. b. 6%.
* c. 11%. d. 14%.
11. If the income elasticity of money demand is 0.75 and the interest elasticity of money demand is -0.25, by what percent does the real money demand rise if real income rises 10% and the nominal interest rate rises from 4% to 5%?
* a. 1.25% b. 5% c. 6.25% d. 7.50%
%∆L(Y, i) = E L, Y * %∆Y + E L, i * %∆i = (0.75) (10%) + (-0.25) (25%) = 7.5% - 6.25% =
College of Business Administration
Department of Economics and Finance
Econ 341 - Monetary Economics
Problem Set 6 (Chapter 22)
AlShawa
1. According to the quantity theory of money, movements in the price level result
* a. solely from changes in the quantity of money. b. primarily from changes in the quantity of money. c. partially from changes in the quantity of money. d. from changes in factors other than the quantity of money.
2. Because Keynes assumed that the expected return on money was zero, he argued that a. people would never hold money. b. people would never hold money as a store of wealth.
* c. people would hold money as a store of wealth when the expected return on bonds was negative. …show more content…
changes in interest rates will have little effect on the demand for money. c. changes in income will have big impact on the demand for money. d. changes in income will have little effect on the demand for money.
8. Suppose the real money demand function is L(i, Y) = 1,000 - 1,000i + 0.2Y. Given that P = 200, Y = 2,000 and i = 10%, velocity is equal to a. 0.65 b. 0.75 c. 1.33
* d. 1.54
9. Which of the following is most likely to lead to a 1% increase in the nominal demand for money? a. Increase in real income by 0.5%. b. Decline in real income by 0.5%.
* c. Increase in the price level by 1%. d. Decline in the price level by 1%.
10. Suppose the real money demand function is L(Y, i) = 2,400 - 10,000 (r + πe) + 0.2Y. Assume MS =4,000, P = 2, Y = 5,000 and πe = 3%. The real interest rate is a. 3%. b. 6%.
* c. 11%. d. 14%.
11. If the income elasticity of money demand is 0.75 and the interest elasticity of money demand is -0.25, by what percent does the real money demand rise if real income rises 10% and the nominal interest rate rises from 4% to 5%?
* a. 1.25% b. 5% c. 6.25% d. 7.50%
%∆L(Y, i) = E L, Y * %∆Y + E L, i * %∆i = (0.75) (10%) + (-0.25) (25%) = 7.5% - 6.25% =