Question 1

Believers in fixed rules maintain that

Accepted Answer

A) with accurate forecasts, we can see inflation coming at least one year ahead of time. 
B) the length of stabilization lags is not important because fiscal policy actions are taken quickly and the economy feels the effect on aggregate demand quickly. 
C) we should forget about discretionary policy and put the economy on autopilot, relying instead on automatic stabilizers and the economy's self-correcting mechanism. 
D) the economy's self-correcting mechanism is slow and not very reliable, even with automatic stabilizers. 
A) with accurate forecasts, we can see inflation coming at least one year ahead of time. 
B) the length of stabilization lags is not important because fiscal policy actions are taken quickly and the economy feels the effect on aggregate demand quickly. 
C) we should forget about discretionary policy and put the economy on autopilot, relying instead on automatic stabilizers and the economy's self-correcting mechanism. 
D) the economy's self-correcting mechanism is slow and not very reliable, even with automatic stabilizers.

Question 2

Stabilizing the economy by fiscal policy need not imply a tendency toward "big government."

Accepted Answer

A) True 
 B)False

Question 3

The equation of exchange states that the money value of GDP transactions must be equal to the product of the average stock of money and velocity.

Accepted Answer

A) True 
 B)False

Question 4

When analyzing how money affects income, we are analyzing the way in which a

Accepted Answer

A) stock affects another stock. 
B) stock affects a flow. 
C) flow affects another flow. 
D) flow affects a stock. 
A) stock affects another stock. 
B) stock affects a flow. 
C) flow affects another flow. 
D) flow affects a stock.

Question 5

Nominal GDP is proportional to money stock when

Accepted Answer

A) velocity of money is volatile. 
B) velocity of money is constant. 
C) there are major changes in the value of velocity of money. 
D) velocity of money is zero. 
A) velocity of money is volatile. 
B) velocity of money is constant. 
C) there are major changes in the value of velocity of money. 
D) velocity of money is zero.

Question 6

The quantity theory of money assumes that velocity is approximately constant resulting in nominal GDP to be proportional to the money stock.

Accepted Answer

A) True 
 B)False

Question 7

In the second quarter of 1995, the following values were observed: real GDP = 4,359.3 billion; GDP deflator = 325.1; and M1 = 989.5.What is the value of velocity?

Accepted Answer

A) 32.51 
B) 24.31 
C) 14.32 
D) 2.31 
A) 32.51 
B) 24.31 
C) 14.32 
D) 2.31

Question 8

Believers in a fixed-rule approach to stabilization policy propose that

Accepted Answer

A) Congress should balance the high employment budget. 
B) the Fed should keep the money supply growth constant. 
C) the economy be stabilized by automatic mechanisms. 
D) All of these responses are correct. 
A) Congress should balance the high employment budget. 
B) the Fed should keep the money supply growth constant. 
C) the economy be stabilized by automatic mechanisms. 
D) All of these responses are correct.

Question 9

During the financial crisis of 2007-2009, why did the Federal Reserve begin to utilize various types of unconventional monetary policy?

Accepted Answer

A) The federal funds rate had already been increased as much as possible. 
B) The discount rate had already been increased as much as possible. 
C) The federal funds rate had already been reduced to zero. 
D) The discount rate had already been reduced to zero. 
A) The federal funds rate had already been increased as much as possible. 
B) The discount rate had already been increased as much as possible. 
C) The federal funds rate had already been reduced to zero. 
D) The discount rate had already been reduced to zero.

Question 10

Both approaches-Keynesian and monetarist-are ways of analyzing

Accepted Answer

A) aggregate supply. 
B) aggregate demand. 
C) the average price level. 
D) government spending and expenditures. 
A) aggregate supply. 
B) aggregate demand. 
C) the average price level. 
D) government spending and expenditures.

Question 11

Which of the following is a reason that the Fed does not traditionally attempt to limit asset price bubbles?

Accepted Answer

A) The Fed's actions could do more harm than good. 
B) It is nearly impossible to determine if a bubble exists before it bursts. 
C) The Fed's policies cannot be targeted at only one sector of the economy. 
D) All of these responses are correct. 
A) The Fed's actions could do more harm than good. 
B) It is nearly impossible to determine if a bubble exists before it bursts. 
C) The Fed's policies cannot be targeted at only one sector of the economy. 
D) All of these responses are correct.

Question 12

As the price level rises, the demand for money

Accepted Answer

A) decreases because interest rates also increase. 
B) decreases because consumers buy fewer goods and services. 
C) increases because more money is needed for each transaction. 
D) increases because investment spending will also increase. 
A) decreases because interest rates also increase. 
B) decreases because consumers buy fewer goods and services. 
C) increases because more money is needed for each transaction. 
D) increases because investment spending will also increase.

Question 13

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

Accepted Answer

A) Velocity 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) Velocity 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) Velocity 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) Velocity 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 14

When something happens to the economy, monetarists ask two questions:

Accepted Answer

A) What does this do to government spending, and what does it do to tax revenues? 
B) What does this do to real GDP, and what does it do to the price level? 
C) What does this do to investment spending, and what does it do to net exports? 
D) What does this do to the money supply, and what does it do to velocity? 
A) What does this do to government spending, and what does it do to tax revenues? 
B) What does this do to real GDP, and what does it do to the price level? 
C) What does this do to investment spending, and what does it do to net exports? 
D) What does this do to the money supply, and what does it do to velocity?

Question 15

An expansionary monetary policy is most likely to produce an inflationary effect with little impact on output when the economy

Accepted Answer

A) is near full employment and the aggregate supply curve is horizontal. 
B) is near full employment and the aggregate supply curve is vertical. 
C) has substantial unemployment and the aggregate supply curve is vertical. 
D) has substantial unemployment and the aggregate supply curve is horizontal. 
A) is near full employment and the aggregate supply curve is horizontal. 
B) is near full employment and the aggregate supply curve is vertical. 
C) has substantial unemployment and the aggregate supply curve is vertical. 
D) has substantial unemployment and the aggregate supply curve is horizontal.

Question 16

According to the simple quantity theory of money, a change in the money supply of 9.6 percent would lead to a

Accepted Answer

A) 9.6 percent change in velocity. 
B) 9.6 percent change in real GDP. 
C) 9.6 percent change in nominal GDP. 
D) 9.6 percent change in aggregate supply. 
A) 9.6 percent change in velocity. 
B) 9.6 percent change in real GDP. 
C) 9.6 percent change in nominal GDP. 
D) 9.6 percent change in aggregate supply.

Question 17

Which of the following will reduce the velocity of circulation of the money stock?

Accepted Answer

A) The inflation rate increases. 
B) The interest rate falls. 
C) Credit cards are used more frequently. 
D) More employees are paid once a week instead of once a month. 
A) The inflation rate increases. 
B) The interest rate falls. 
C) Credit cards are used more frequently. 
D) More employees are paid once a week instead of once a month.

Question 18

What are some examples of the unconventional monetary policy from the Federal Reserve in response to the 2007-2009 financial crisis? Why were opponents concerned about these measures?

Accepted Answer

The unconventional monetary policy used

Question 19

The subprime mortgage bubble featured ____ leverage, and the technology stock bubble featured ____ leverage.

Accepted Answer

A) significant; significant 
B) significant; limited 
C) limited; significant 
D) limited; limited 
A) significant; significant 
B) significant; limited 
C) limited; significant 
D) limited; limited

Question 20

Which of the following policies would a Keynesian expect to produce the largest increase in income?

Accepted Answer

A) A reduction in government spending of $100 billion 
B) An increase in transfer payments of $100 billion 
C) An increase in government spending of $100 billion 
D) A tax cut of $100 billion 
A) A reduction in government spending of $100 billion 
B) An increase in transfer payments of $100 billion 
C) An increase in government spending of $100 billion 
D) A tax cut of $100 billion

Exam 31: The Debate Over Monetary and Fiscal Policy

Believers in fixed rules maintain that

Stabilizing the economy by fiscal policy need not imply a tendency toward "big government."

The equation of exchange states that the money value of GDP transactions must be equal to the product of the average stock of money and velocity.

When analyzing how money affects income, we are analyzing the way in which a

Nominal GDP is proportional to money stock when

The quantity theory of money assumes that velocity is approximately constant resulting in nominal GDP to be proportional to the money stock.

In the second quarter of 1995, the following values were observed: real GDP = 4,359.3 billion; GDP deflator = 325.1; and M1 = 989.5.What is the value of velocity?

Believers in a fixed-rule approach to stabilization policy propose that

During the financial crisis of 2007-2009, why did the Federal Reserve begin to utilize various types of unconventional monetary policy?

Both approaches-Keynesian and monetarist-are ways of analyzing

Which of the following is a reason that the Fed does not traditionally attempt to limit asset price bubbles?

As the price level rises, the demand for money

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

When something happens to the economy, monetarists ask two questions:

An expansionary monetary policy is most likely to produce an inflationary effect with little impact on output when the economy

According to the simple quantity theory of money, a change in the money supply of 9.6 percent would lead to a

Which of the following will reduce the velocity of circulation of the money stock?

What are some examples of the unconventional monetary policy from the Federal Reserve in response to the 2007-2009 financial crisis? Why were opponents concerned about these measures?

The subprime mortgage bubble featured ____ leverage, and the technology stock bubble featured ____ leverage.

Which of the following policies would a Keynesian expect to produce the largest increase in income?

What Is Economics

The Economony: 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

The Financial Markets and the Economy: the Tail That Wags the Dog

The Firm and the Industry Under Perfect Competition

The Case for Free Markets: the Price System

Monopoly

Between Competition and Monopoly

Limiting Market Power: Antitrust and Regulation

The Shortcomings of Free Markets

The Economics of 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

Contemporary Issues in the Useconomy

Filters

In the second quarter of 1995, the following values were observed: real GDP = 4,359.3 billion; GDP deflator = 325.1; and M₁ = 989.5.What is the value of velocity?

The subprime mortgage bubble featured leverage, and the technology stock bubble featured leverage.