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If the demand for money is unstable then ____.
A) velocity is unpredictable
B) quantity of money is not linked to aggregated spending
C) aggregate spending rises
D) both A and B
Answer: D
Diff: 2 Type: MC Page Ref: 537
Skill: Recall
Objective List: 21.2 Define the theories of the demand for money
Until the early 1970s evidence strongly supported ____.
A) stability of the money demand function
B) variability of money demand
C) increasing financial innovation
D) the importance of fiscal policy
Answer: A
Diff: 1 Type: MC Page Ref: 537
Skill: Recall
Objective List: 21.2 Define the theories of the demand for money
If the money demand function is instable then ____.
A) velocity of money is unstable and monetary policy is more effective
B) monetary policy is ineffective
C) fiscal policy is more effective than monetary policy
D) neither fiscal nor monetary policy will impact aggregate output
Answer: A
Diff: 1 Type: MC Page Ref: 537
Skill: Recall
Objective List: 21.2 Define the theories of the demand for money
Describe what the liquidity trap is. Explain how it can be problematic for monetary
policymakers.
Answer: The liquidity trap describes the situation in which the demand for money is insensitive
to changes in interest rates (i.e., the money demand curve is infinitely elastic). In this case,
monetary policy has no direct affect on aggregate spending because a change in the money
supply will not affect interest rates.
Diff: 2 Type: SA Page Ref: 536
Skill: Recall
Objective List: 21.3 Present empirical evidence on how the demand for money is affected by
changes in interest rates and the level of income