Question 1

If V is constant, the rate of growth of M that is consistent with a stable price level is

Accepted Answer

A) zero. 
B) the rate of growth of PQ. 
C) the rate of growth of Q. 
D) the expected rate of inflation. 
E) none of the above 
A) zero. 
B) the rate of growth of PQ. 
C) the rate of growth of Q. 
D) the expected rate of inflation. 
E) none of the above

Question 2

Exhibit 14-1
  
-Refer to Exhibit 14-1. Starting from point A, a one shot, supply-side-induced inflation raises the price level in the economy to P2. Assuming no other changes, in the long run the economy is likely to settle at point

Accepted Answer

A) A. 
B) B. 
C) C. 
D) D. 
E) E. 
A) A. 
B) B. 
C) C. 
D) D. 
E) E.

Question 3

The income effect is the

Accepted Answer

A) increase in the interest rate caused by an increase in Real GDP. 
B) increase in the interest rate due to a higher expected inflation rate. 
C) decrease in the interest rate due to an increase in the supply of loanable funds. 
D) change in national income brought about by a change in interest rates. 
E) rate of change in national income brought about by a change in the supply of money. 
A) increase in the interest rate caused by an increase in Real GDP. 
B) increase in the interest rate due to a higher expected inflation rate. 
C) decrease in the interest rate due to an increase in the supply of loanable funds. 
D) change in national income brought about by a change in interest rates. 
E) rate of change in national income brought about by a change in the supply of money.

Question 4

The chief difference between one-shot inflation and continued inflation is that

Accepted Answer

A) Keynesians believe all inflations are one-shot inflations and monetarists believe all inflations are continued inflations. 
B) one-shot inflation is long and continued inflation is short. 
C) one-shot inflation is a single increase in the price level and continued inflation is a sustained increase in the price level. 
D) monetarists believe all inflations are one-shot inflations and Keynesians believe all inflations are continued inflations. 
A) Keynesians believe all inflations are one-shot inflations and monetarists believe all inflations are continued inflations. 
B) one-shot inflation is long and continued inflation is short. 
C) one-shot inflation is a single increase in the price level and continued inflation is a sustained increase in the price level. 
D) monetarists believe all inflations are one-shot inflations and Keynesians believe all inflations are continued inflations.

Question 5

Based upon the equation of exchange, which of the following can cause an increase in the price level?

Accepted Answer

A) a decrease in velocity 
B) a decrease in the money supply 
C) an increase in Real GDP 
D) an increase in the money supply 
E) c and d 
A) a decrease in velocity 
B) a decrease in the money supply 
C) an increase in Real GDP 
D) an increase in the money supply 
E) c and d

Question 6

An increase in the money supply that leads to an increase in expected inflation, which in turn leads to an increase in the interest rate, is best described as the

Accepted Answer

A) liquidity effect. 
B) income effect. 
C) expectations effect. 
D) adaptive expectations theory. 
A) liquidity effect. 
B) income effect. 
C) expectations effect. 
D) adaptive expectations theory.

Question 7

According to the simple quantity theory of money in the AD-AS framework, when the money supply increases, the result is __________ in Real GDP and __________ in the price level.

Accepted Answer

A) no change; no change 
B) a rise; no change 
C) no change; a rise 
D) a rise; a fall 
E) a fall; a rise 
A) no change; no change 
B) a rise; no change 
C) no change; a rise 
D) a rise; a fall 
E) a fall; a rise

Question 8

Which of the following statements is false?

Accepted Answer

A) Monetarists believe that the velocity of money is highly stable. 
B) Monetarists believe that the velocity of money is predictable. 
C) Monetarists believe that the economy will settle into long-run equilibrium at less than full employment output. 
D) Monetarists believe that output can be at less than full employment output in the short run. 
A) Monetarists believe that the velocity of money is highly stable. 
B) Monetarists believe that the velocity of money is predictable. 
C) Monetarists believe that the economy will settle into long-run equilibrium at less than full employment output. 
D) Monetarists believe that output can be at less than full employment output in the short run.

Question 9

One-shot inflation can originate

Accepted Answer

A) only on the demand side of the economy. 
B) only on the supply side of the economy. 
C) on the demand side or the supply side of the economy. 
D) on neither the demand side nor the supply side of the economy. 
A) only on the demand side of the economy. 
B) only on the supply side of the economy. 
C) on the demand side or the supply side of the economy. 
D) on neither the demand side nor the supply side of the economy.

Question 10

Describe the expectations (or Fisher) effect.

Accepted Answer

The expectations effect (or Fisher effec

Question 11

According to the simple quantity theory of money in the AD-AS framework, when the money supply decreases, the result is __________ in Real GDP and __________ in the price level.

Accepted Answer

A) no change; no change 
B) a rise; no change 
C) no change; a rise 
D) a rise; a fall 
E) no change; a fall 
A) no change; no change 
B) a rise; no change 
C) no change; a rise 
D) a rise; a fall 
E) no change; a fall

Question 12

The equation of exchange is an economic theory.

Accepted Answer

A) True 
 B)False

Question 13

If the real interest rate is 7.1 percent and the expected inflation rate is 2.1 percent, the nominal interest rate is

Accepted Answer

A) 9.2 percent. 
B) 7.1 percent. 
C) 4.1 percent. 
D) 5 percent. 
E) 0.5 percent. 
A) 9.2 percent. 
B) 7.1 percent. 
C) 4.1 percent. 
D) 5 percent. 
E) 0.5 percent.

Question 14

Describe the difference between the simple quantity theory of money and the equation of exchange.

Accepted Answer

The equation of exchange is an identity

Question 15

In the simple quantity theory of money, the price level is assumed to be constant.

Accepted Answer

A) True 
 B)False

Question 16

According to the equation of exchange, if GDP equals $2.5 trillion and the money supply equals $1 trillion, the velocity of money

Accepted Answer

A) must be 2.5. 
B) must be 4. 
C) must be 0.25 trillion. 
D) must be 4 trillion. 
E) cannot be determined without knowing what the price level is. 
A) must be 2.5. 
B) must be 4. 
C) must be 0.25 trillion. 
D) must be 4 trillion. 
E) cannot be determined without knowing what the price level is.

Question 17

Exhibit 14-1
  
-Refer to Exhibit 14-1. A continued increase in the price of oil, combined with Fed attempts to respond to these oil shocks by increasing aggregate demand, is likely to take the economy along which of the following paths?

Accepted Answer

A) A-E-B-H-C 
B) A-E-G-I-C 
C) A-D-B-E-A 
D) A-D-B-H-C 
E) A-E-B-I-C 
A) A-E-B-H-C 
B) A-E-G-I-C 
C) A-D-B-E-A 
D) A-D-B-H-C 
E) A-E-B-I-C

Question 18

In the equation of exchange, "Q" stands for

Accepted Answer

A) the interest rate. 
B) quality. 
C) GDP. 
D) Real GDP. 
A) the interest rate. 
B) quality. 
C) GDP. 
D) Real GDP.

Question 19

Both the monetarist view of the economy and the simple quantity theory of money hold that velocity is constant.

Accepted Answer

A) True 
 B)False

Question 20

Real-world continued inflation is probably a result of continued

Accepted Answer

A) increases in aggregate demand. 
B) decreases in aggregate demand. 
C) increases in aggregate supply. 
D) decreases in aggregate supply. 
A) increases in aggregate demand. 
B) decreases in aggregate demand. 
C) increases in aggregate supply. 
D) decreases in aggregate supply.

Exam 14: Money and the Economy

If V is constant, the rate of growth of M that is consistent with a stable price level is

Exhibit 14-1 -Refer to Exhibit 14-1. Starting from point A, a one shot, supply-side-induced inflation raises the price level in the economy to P2. Assuming no other changes, in the long run the economy is likely to settle at point

The income effect is the

The chief difference between one-shot inflation and continued inflation is that

Based upon the equation of exchange, which of the following can cause an increase in the price level?

An increase in the money supply that leads to an increase in expected inflation, which in turn leads to an increase in the interest rate, is best described as the

According to the simple quantity theory of money in the AD-AS framework, when the money supply increases, the result is __________ in Real GDP and __________ in the price level.

Which of the following statements is false?

One-shot inflation can originate

Describe the expectations (or Fisher) effect.

According to the simple quantity theory of money in the AD-AS framework, when the money supply decreases, the result is __________ in Real GDP and __________ in the price level.

The equation of exchange is an economic theory.

If the real interest rate is 7.1 percent and the expected inflation rate is 2.1 percent, the nominal interest rate is

Describe the difference between the simple quantity theory of money and the equation of exchange.

In the simple quantity theory of money, the price level is assumed to be constant.

According to the equation of exchange, if GDP equals $2.5 trillion and the money supply equals $1 trillion, the velocity of money

Exhibit 14-1 -Refer to Exhibit 14-1. A continued increase in the price of oil, combined with Fed attempts to respond to these oil shocks by increasing aggregate demand, is likely to take the economy along which of the following paths?

In the equation of exchange, "Q" stands for

Both the monetarist view of the economy and the simple quantity theory of money hold that velocity is constant.

Real-world continued inflation is probably a result of continued

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Exhibit 14-1 -Refer to Exhibit 14-1. Starting from point A, a one shot, supply-side-induced inflation raises the price level in the economy to P₂. Assuming no other changes, in the long run the economy is likely to settle at point

According to the simple quantity theory of money in the AD-AS framework, when the money supply increases, the result is in Real GDP and in the price level.

According to the simple quantity theory of money in the AD-AS framework, when the money supply decreases, the result is in Real GDP and in the price level.