Money Demand

The crucial difference between the Keynesian and classical theories of money demand is that

• Keynes believed that money demand fluctuates with the return on other assets while the classical economists did not.

• Keynes took account of the transactions motive for money demand while the classical economists did not.

• Keynes assumed that velocity was constant while the classical economists did not.

• the classical economists considered income as a systematic influence on money demand and Keynes did not.

What function of money is utilized when a portfolio of assets are valued in dollars?

• a. The unit of account function

• b. The store of value function

• c. The means of exchange function

• d. The standard of deferred payment function

• none of above

Tobin explains the demand for money as a store of wealth

• a. as the result of money illusion.

• b. as an attempt to reduce riskiness of a portfolio.

• c. due to fear of bankruptcy on the part of firms.

• d. due to uncertainty about the future stream of transactions.

Tobin's theory of the demand for money as an asset is similar to Keynes' theory of the speculative demand for money in that

• a. neither can explain portfolio diversification.

• b. both imply that money demand depends inversely on the level of the interest rate.

• c. both rely on the assumption that investors have a "normal" rate to which they expect the interest rate to return.

• d. both imply that investors will choose to hold money when they expect the interest rate to decline in the future.

According to Tobin's theory of the asset demand for money, an increase in uncertainty concerning bond prices would be expected to cause the demand for

• money to fall and the demand for bonds to rise.

• bonds to fall and the demand for money to rise.

• both money and bonds to rise.

• both money and bonds to fall.

According to Tobin's theory of the asset demand for money, an increase in the interest rate accompanied by a fall in uncertainty concerning bond prices

• would increase money demand.

• would increase the demand for bonds.

• would increase both money demand and the demand for bonds.

• might cause money demand to rise or fall.

• would have no effect on either the demand for money or bonds.

Assume that a person receives a cash income of $2,000 per month and spends this money uniformly and predictably through the month. Then, according to the inventory/theoretic approach to money demand, his or her average inventory of money will amount to

• between zero and $2,000.

• Zero

• $500

• $1000

According to the Baumol-Tobin theory of money demand,

• a. the demand for money as a store of wealth depends negatively on the interest rate.

• b. the demand for money as a store of wealth depends positively on the rate of interest.

• c. an increase in the interest rate is an increase in the payment received for not holding money.

• Both a and c

• Both b and c

According to the inventory/theoretic approach to money demand, an increase in the interest rate

• increases the optimum number of bond market transactions.

• decreases the optimum number of bond market transactions.

• will not alter the optimum number of bond market transactions.

• could either increase or decrease the optimum number of bond market transactions.

In the Baumol-Tobin model of money demand, an increase in the fees charged for ATM transactions would lead to a

• decrease in average money holdings and decrease in the number of transactions.

• increase in average money holdings and increase in the number of transactions.

• increase in average money holdings and decrease in the number of transactions.

• no change in average money holdings and decrease in the number of transactions.