Empirical Studies Indicate That the Velocity of Money Tends to Increase

question 151

Multiple Choice

Empirical studies indicate that the velocity of money tends to increase when interest rates rise. Which of the following best explains why this is true?

• A) When the velocity of money is high, banks will increase their lending interest rates.
• B) An increase in the growth rate of GDP will cause the velocity of money to increase.
• C) The higher interest rates increase the cost of holding money balances and, thereby, increase the velocity of money.
• D) Both the velocity of money and interest rates will rise when the inflation rate falls.

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Definitions:

Human Wants

The desires and needs of individuals for goods, services, and other intangibles that lead to satisfaction.

Opportunity Cost

The toll taken for not picking the second highest preference when decisions are formulated.

Tax Cut

A reduction in the amount of taxes imposed by the government, which can affect individuals, corporations, or specific sectors.

State Expenditures

The total spending by state governments on various public services, infrastructure, education, and welfare programs.