Question 1

What do most economists think is the most accurate statement about velocity?

Accepted Answer

A)  It is fairly constant in the short run, but varies considerably in the long run, complicating predictions about nominal GDP. 
B)  M₁ velocity is more stable in the short run than M2 velocity, and it has been a superior tool in predicting changes in nominal GDP. 
C)  It is not constant in the short run, and predictions about nominal GDP have not fared well. 
D)  M2 velocity has been less stable than M₁ velocity, but both are reliable enough to make accurate predictions about changes in nominal GDP. 
A)  It is fairly constant in the short run, but varies considerably in the long run, complicating predictions about nominal GDP. 
B)  M₁ velocity is more stable in the short run than M2 velocity, and it has been a superior tool in predicting changes in nominal GDP. 
C)  It is not constant in the short run, and predictions about nominal GDP have not fared well. 
D)  M2 velocity has been less stable than M₁ velocity, but both are reliable enough to make accurate predictions about changes in nominal GDP.

Question 2

Define the following terms and explain their importance to the study of macroeconomics.
a.the relationship between interest rates and velocity
b.lags in stabilization policy
c.rules versus discretion

Accepted Answer

a.A change in interest rates changes the

Question 3

Government spending affects aggregate demand directly, and tax changes affect aggregate demand indirectly.Therefore, changes in

Accepted Answer

A)  taxes are ineffective in changing aggregate demand. 
B)  government spending affect aggregate demand more quickly than changes in taxes. 
C)  taxes are virtually useless as a stabilization tool. 
D)  government spending should be used with great caution. 
A)  taxes are ineffective in changing aggregate demand. 
B)  government spending affect aggregate demand more quickly than changes in taxes. 
C)  taxes are virtually useless as a stabilization tool. 
D)  government spending should be used with great caution.

Question 4

A major advantage of monetary policy over fiscal policy is that monetary

Accepted Answer

A)  policy affects all sectors of the economy equally. 
B)  policy can be put into effect more quickly. 
C)  policy, once implemented, takes effect more quickly. 
D)  authorities see the need for policy more quickly. 
A)  policy affects all sectors of the economy equally. 
B)  policy can be put into effect more quickly. 
C)  policy, once implemented, takes effect more quickly. 
D)  authorities see the need for policy more quickly.

Question 5

If the velocity of circulation is 10 and the money supply is $250, the value of transactions will be $25.

Accepted Answer

A) True 
 B)False

Question 6

The Federal Reserve has policy instruments that it can aim directly at a specific category of asset price bubble.

Accepted Answer

A) True 
 B)False

Question 7

If velocity remains relatively constant, changes in the money supply can have a predictable effect on nominal GDP.

Accepted Answer

A) True 
 B)False

Question 8

According to the monetarists, the velocity of money is

Accepted Answer

A)  constant by definition. 
B)  highly variable and unpredictable. 
C)  constant as a matter of empirical proof. 
D)  not constant but predictable. 
A)  constant by definition. 
B)  highly variable and unpredictable. 
C)  constant as a matter of empirical proof. 
D)  not constant but predictable.

Question 9

After September 11, 2001, a small group of economists argued that the economy's self-correcting mechanism would work to counteract the recessionary effects of the attack.

Accepted Answer

A) True 
 B)False

Question 10

Advocates of active stabilization policies, in defense of their views, argue that

Accepted Answer

A)  stabilization is less necessary than is commonly advocated by monetarists. 
B)  discretionary policy in not necessary because automatic stabilizers are sufficient. 
C)  perfect stabilization is not possible, but moderate improvements in economic performance are possible, such as the response to the events of September 11, 2001. 
D)  All of the above are correct. 
A)  stabilization is less necessary than is commonly advocated by monetarists. 
B)  discretionary policy in not necessary because automatic stabilizers are sufficient. 
C)  perfect stabilization is not possible, but moderate improvements in economic performance are possible, such as the response to the events of September 11, 2001. 
D)  All of the above are correct.

Question 11

Which of the following was a reason that the Federal Reserve took on additional risks associated with unconventional policy during the recession of 2007-2009?

Accepted Answer

A)  The inflated price of Treasury bills made them too expensive to purchase in open market operations. 
B)  The large budget deficit constrained conventional monetary policy. 
C)  The U.S.Treasury was unable to sell Treasury bills in the primary market. 
D)  The Fed was able to act more quickly than Congress. 
A)  The inflated price of Treasury bills made them too expensive to purchase in open market operations. 
B)  The large budget deficit constrained conventional monetary policy. 
C)  The U.S.Treasury was unable to sell Treasury bills in the primary market. 
D)  The Fed was able to act more quickly than Congress.

Question 12

Data indicate that the velocity of M₁ is greater than the velocity of M2.

Accepted Answer

A) True 
 B)False

Question 13

The relationship between money growth rates and inflation between 1982 and 2010 helps explain why, by the 1990s, most economists had

Accepted Answer

A)  adopted the monetarist explanation of inflation. 
B)  adopted a rules-only approach to monetary policy. 
C)  become more convinced of the monetary causes of inflation. 
D)  abandoned monetarism as the primary explanation of inflation. 
A)  adopted the monetarist explanation of inflation. 
B)  adopted a rules-only approach to monetary policy. 
C)  become more convinced of the monetary causes of inflation. 
D)  abandoned monetarism as the primary explanation of inflation.

Question 14

Explain the importance of the shape of supply curve for undertaking stabilization policies.

Accepted Answer

If the aggregate supply curve is flat, e

Question 15

The equation M × V = P × Y is called the

Accepted Answer

A)  multiplier formula. 
B)  transactions formula. 
C)  equation of exchange. 
D)  balanced exchange formula. 
A)  multiplier formula. 
B)  transactions formula. 
C)  equation of exchange. 
D)  balanced exchange formula.

Question 16

Keynesian belief that the aggregate supply curve is relatively flat in the short run means that they expect their policies to cause

Accepted Answer

A)  small increases in output and much inflation. 
B)  small increases in output and little inflation. 
C)  large increases in output and little inflation. 
D)  large increases in output and much inflation. 
A)  small increases in output and much inflation. 
B)  small increases in output and little inflation. 
C)  large increases in output and little inflation. 
D)  large increases in output and much inflation.

Question 17

Which of the following is an example of the Fed's use of unconventional monetary policy?

Accepted Answer

A)  buying assets other than Treasury bills 
B)  participating in rescue operations for troubled financial institutions 
C)  lending massive amounts to banks and other financial institutions 
D)  all of the above 
A)  buying assets other than Treasury bills 
B)  participating in rescue operations for troubled financial institutions 
C)  lending massive amounts to banks and other financial institutions 
D)  all of the above

Question 18

If the Fed's monetary policy causes a substantial increase in interest rates, what is the most likely impact on velocity?

Accepted Answer

A)  It will decrease. 
B)  It will increase. 
C)  It will remain constant. 
D)  Velocity is unrelated to interest rates. 
A)  It will decrease. 
B)  It will increase. 
C)  It will remain constant. 
D)  Velocity is unrelated to interest rates.

Question 19

As we approached the end of the millennium, many economic crackpots advised citizens to hold large quantities of cash in anticipation of Y2K disasters.What effect would this have had on velocity if many people had been foolish enough to follow this advice?

Accepted Answer

A)  It would have decreased. 
B)  It would have increased. 
C)  It would have remained constant. 
D)  Velocity is unrelated to cash balances. 
A)  It would have decreased. 
B)  It would have increased. 
C)  It would have remained constant. 
D)  Velocity is unrelated to cash balances.

Question 20

In 1996, if nominal GDP was about $8.5 thousand billion.The stock of money was

Accepted Answer

A)  about the same as this. 
B)  much less than this. 
C)  much more than this. 
D)  unrelated to this number. 
A)  about the same as this. 
B)  much less than this. 
C)  much more than this. 
D)  unrelated to this number.

Exam 32: The Debate over Monetary and Fiscal Policy

What do most economists think is the most accurate statement about velocity?

Define the following terms and explain their importance to the study of macroeconomics. a.the relationship between interest rates and velocity b.lags in stabilization policy c.rules versus discretion

Government spending affects aggregate demand directly, and tax changes affect aggregate demand indirectly.Therefore, changes in

A major advantage of monetary policy over fiscal policy is that monetary

If the velocity of circulation is 10 and the money supply is $250, the value of transactions will be $25.

The Federal Reserve has policy instruments that it can aim directly at a specific category of asset price bubble.

If velocity remains relatively constant, changes in the money supply can have a predictable effect on nominal GDP.

According to the monetarists, the velocity of money is

After September 11, 2001, a small group of economists argued that the economy's self-correcting mechanism would work to counteract the recessionary effects of the attack.

Advocates of active stabilization policies, in defense of their views, argue that

Which of the following was a reason that the Federal Reserve took on additional risks associated with unconventional policy during the recession of 2007-2009?

Data indicate that the velocity of M₁ is greater than the velocity of M2.

The relationship between money growth rates and inflation between 1982 and 2010 helps explain why, by the 1990s, most economists had

Explain the importance of the shape of supply curve for undertaking stabilization policies.

The equation M × V = P × Y is called the

Keynesian belief that the aggregate supply curve is relatively flat in the short run means that they expect their policies to cause

Which of the following is an example of the Fed's use of unconventional monetary policy?

If the Fed's monetary policy causes a substantial increase in interest rates, what is the most likely impact on velocity?

As we approached the end of the millennium, many economic crackpots advised citizens to hold large quantities of cash in anticipation of Y2K disasters.What effect would this have had on velocity if many people had been foolish enough to follow this advice?

In 1996, if nominal GDP was about $8.5 thousand billion.The stock of money was

What Is Economics?

The Economy: Myth and Reality

The Fundamental Economic Problem: Scarcity and Choice

Supply and Demand: An Initial Look

Consumer Choice: Individual and Market Demand

Demand and Elasticity

Production, Inputs, and Cost: Building Blocks for Supply Analysis

Output, Price, and Profit: The Importance of Marginal Analysis

Securities: Business Finance, and the Economy: The Tail that Wags the Dog?

The Firm and the Industry under Perfect Competition

Monopoly

Between Competition and Monopoly

Limiting Market Power: Regulation and Antitrust

The Case for Free Markets I: The Price System

The Shortcomings of Free Markets

The Market's Prime Achievement: Innovation and Growth

Externalities, the Environment, and Natural Resources

Taxation and Resource Allocation

Pricing the Factors of Production

Labor and Entrepreneurship: The Human Inputs

Poverty, Inequality, and Discrimination

An Introduction to Macroeconomics

The Goals of Macroeconomic Policy

Economic Growth: Theory and Policy

Aggregate Demand and the Powerful Consumer

Demand-Side Equilibrium: Unemployment or Inflation?

Bringing in the Supply Side: Unemployment and Inflation?

Managing Aggregate Demand: Fiscal Policy

Money and the Banking System

Monetary Policy: Conventional and Unconventional

The Financial Crisis and the Great Recession

Budget Deficits in the Short and Long Run

The Trade-Off between Inflation and Unemployment

International Trade and Comparative Advantage

The International Monetary System: Order or Disorder?

Exchange Rates and the Macroeconomy

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