Question 1

According to the traditional (narrow) measure of money supply, which of the following is included in M1?

Accepted Answer

Currency (coins & notes) and demand deposits

Question 2

Which equation best represents Irving Fisher’s quantity theory of money?

Accepted Answer

$$MV = PT$$

Question 3

Which of the following is NOT a primary function of money?

Accepted Answer

Issuing government bonds

Question 4

According to Keynes, which motive for holding money is most directly related to uncertainty about the future?

Accepted Answer

Precautionary motive

Question 5

Which of the following best describes the liquidity trap as shown in the second image?

Accepted Answer

A situation where the speculative demand for money becomes perfectly elastic at a very low interest rate

Question 6

Which of the following is a limitation of cryptocurrency?

Accepted Answer

It has high volatility and regulatory uncertainty

Question 7

According to the Cambridge (neo-classical) approach, the demand for money is given by which equation?

Accepted Answer

$$Md = kPY$$

Question 8

Which of the following factors would most likely increase the velocity of circulation of money?

Accepted Answer

More efficient payment and banking arrangements

Question 9

In the context of the money multiplier, which formula correctly expresses the relationship between high powered money (H), currency (C), and reserves (R)?

Accepted Answer

$$H = C + R$$

Question 10

Which of the following is a key insight from Milton Friedman’s restatement of the demand for money?

Accepted Answer

Money demand depends on permanent income and is relatively stable

Question 11

Suppose the market rate of interest falls below 2%. According to Keynes, what is likely to happen to the speculative demand for money?

Accepted Answer

It becomes perfectly elastic (liquidity trap)

Question 12

Which of the following is NOT considered a component of broad money (M4) in the modern approach?

Accepted Answer

Central bank reserves

Question 13

If the velocity of money increases while the money supply and price level remain constant, what happens to the total value of transactions ($$PT) $$according to Fisher’s equation?

Accepted Answer

It increases

Question 14

Which of the following best describes the speculative motive for holding money?

Accepted Answer

Holding money to take advantage of expected changes in bond prices and interest rates

Question 15

Which of the following is a determinant of money supply?

Accepted Answer

Central bank, depository institutions, and the public

Question 16

In the Keynesian framework, which equation represents the total demand for money?

Accepted Answer

$$Md = L1(y) + L2(r)$$

Question 17

Which of the following is a real-world example of the precautionary motive for holding money?

Accepted Answer

Keeping extra cash in case of sudden medical emergencies

Question 18

Which of the following is a plausible consequence of high volatility in cryptocurrency markets?

Accepted Answer

Investors face significant risk of financial loss

Money Supply and Demand: Concepts, Theories, and Applications

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