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:

Heuristic

A problem-solving approach that employs a practical method not guaranteed to be perfect, but sufficient for reaching an immediate goal.

Fixedness

A cognitive bias that limits a person to using an object only in the way it is traditionally used, hindering problem-solving and creativity.

Representativeness Heuristic

A mental shortcut that involves making a probability judgment by comparing an object or event to a prototype of the object or event.

Availability Heuristic

A cognitive bias that causes people to overestimate the importance of information that is readily available to them.