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:

Ordinary Shares

Shares of a company providing ownership rights and potential dividends to holders but usually with voting rights.

Tax Expense

The sum of the current tax and deferred tax charged to an entity's profit or loss for the period.

Preference Dividends

Dividends that are paid to holders of preferred shares, typically at a fixed rate, before any dividends are paid to common shareholders.

EPS

Earnings Per Share, a financial ratio that indicates the portion of a company's profit allocated to each outstanding share of common stock, serving as an indicator of the company's profitability.