Question 1

Advocates of activist policymaking point to the swift response of the Fed after September 11, 2001, as an example of effective policymaking.

Accepted Answer

A) True 
 B)False

Question 2

If financial news broadcasts reported that inflation was likely to rise significantly next year, what would most likely happen to the velocity of circulation?

Accepted Answer

A) Velocity will decrease. 
B) Velocity will increase. 
C) Velocity will remain constant. 
D) Velocity is unrelated to inflation. 
A) Velocity will decrease. 
B) Velocity will increase. 
C) Velocity will remain constant. 
D) Velocity is unrelated to inflation.

Question 3

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

Accepted Answer

If the aggregate supply curve is flat, e

Question 4

In the presence of long lags, attempts at stabilizing the economy may actually destabilize it.

Accepted Answer

A) True 
 B)False

Question 5

In 2005-2006, the Fed increased interest rates in an attempt to halt inflation.What was the most likely effect of raising interest rates on velocity?

Accepted Answer

A) Velocity will decrease. 
B) Velocity will increase. 
C) Velocity will remain constant. 
D) Velocity is unrelated to saving accounts. 
A) Velocity will decrease. 
B) Velocity will increase. 
C) Velocity will remain constant. 
D) Velocity is unrelated to saving accounts.

Question 6

If you believe that velocity is constant and that the aggregate supply curve is horizontal, then the quantity theory of money would predict that a doubling of the money supply would cause a doubling of the

Accepted Answer

A) price level and real output. 
B) price level. 
C) price level and no change in real output. 
D) real output. 
A) price level and real output. 
B) price level. 
C) price level and no change in real output. 
D) real output.

Question 7

According to the quantity theory of money, a decision on the part of all business firms currently paying employees on a monthly basis to begin paying on a weekly basis would be expected to

Accepted Answer

A) increase velocity and increase nominal GDP. 
B) increase velocity and decrease nominal GDP. 
C) decrease velocity and increase nominal GDP. 
D) decrease velocity and decrease nominal GDP. 
A) increase velocity and increase nominal GDP. 
B) increase velocity and decrease nominal GDP. 
C) decrease velocity and increase nominal GDP. 
D) decrease velocity and decrease nominal GDP.

Question 8

Advocates of fixed rules believe that politicians focus more on reelection than on sound policy.

Accepted Answer

A) True 
 B)False

Question 9

The reason that velocity increases when interest rates rise is

Accepted Answer

A) the Fed encourages banks to turn money in faster for recycling, which causes money to move faster. 
B) the opportunity cost of saving increases, so people hold smaller cash balances. 
C) home mortgage payments increase, so people write larger checks that reduces their checking account balances. 
D) the opportunity cost of holding money increases, so average money balances decrease. 
A) the Fed encourages banks to turn money in faster for recycling, which causes money to move faster. 
B) the opportunity cost of saving increases, so people hold smaller cash balances. 
C) home mortgage payments increase, so people write larger checks that reduces their checking account balances. 
D) the opportunity cost of holding money increases, so average money balances decrease.

Question 10

How rapidly does the economy's self-correcting mechanism work? Most economists agree that it

Accepted Answer

A) works quickly and reliably. 
B) works slowly and not very reliably. 
C) works reliably, but not very quickly. 
D) does not work at all. 
A) works quickly and reliably. 
B) works slowly and not very reliably. 
C) works reliably, but not very quickly. 
D) does not work at all.

Question 11

Velocity is commonly calculated by which of the following formulas?

Accepted Answer

A) (Value of money stock) / (Value of nominal GDP) 
B) (Value of transactions) / (Money stock) 
C) (Value of financial transactions) / (GDP) 
D) (Value of output) / (Value of input) 
A) (Value of money stock) / (Value of nominal GDP) 
B) (Value of transactions) / (Money stock) 
C) (Value of financial transactions) / (GDP) 
D) (Value of output) / (Value of input)

Question 12

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

Question 13

The equation of exchange can be written as

Accepted Answer

A) velocity × nominal GDP = price index. 
B) real GDP × price index = money supply. 
C) money supply × price index = real GDP. 
D) money supply × velocity = nominal GDP. 
A) velocity × nominal GDP = price index. 
B) real GDP × price index = money supply. 
C) money supply × price index = real GDP. 
D) money supply × velocity = nominal GDP.

Question 14

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

Accepted Answer

A) True 
 B)False

Question 15

_________ are more inclined to keep the government hands off the economy and favor adhering to fixed rules.

Accepted Answer

A) Conservatives 
B) Liberals 
C) Politicians 
D) None of the above is correct. 
A) Conservatives 
B) Liberals 
C) Politicians 
D) None of the above is correct.

Question 16

The equation of exchange is M × V = P × Y.

Accepted Answer

A) True 
 B)False

Question 17

Historically, most harmful bubbles are characterized by

Accepted Answer

A) investment in stocks. 
B) the sale of Treasury bills. 
C) heaving borrowing. 
D) reliance on technology. 
A) investment in stocks. 
B) the sale of Treasury bills. 
C) heaving borrowing. 
D) reliance on technology.

Question 18

What role does ideology play in the debate on stabilization?

Accepted Answer

A) A large role because there are conservative and liberal economists. 
B) A primary role because there are no economic aspects to the debate at all. 
C) A minor role because economists are fairly uniform in their political views. 
D) No role at all because this is purely a technical question. 
A) A large role because there are conservative and liberal economists. 
B) A primary role because there are no economic aspects to the debate at all. 
C) A minor role because economists are fairly uniform in their political views. 
D) No role at all because this is purely a technical question.

Question 19

The inflation rate in January 2009 as measured by the CPI was zero.If inflation were to remain at zero for a long period, what would be the effect on velocity?

Accepted Answer

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

Question 20

Describe an asset price bubble and give examples.Explain why it is extremely difficult if not impossible for the Federal Reserve to prevent such bubbles.

Accepted Answer

A price bubble is an increase in the pri

Exam 31: The Debate Over Monetary and Fiscal Policy

Advocates of activist policymaking point to the swift response of the Fed after September 11, 2001, as an example of effective policymaking.

If financial news broadcasts reported that inflation was likely to rise significantly next year, what would most likely happen to the velocity of circulation?

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

In the presence of long lags, attempts at stabilizing the economy may actually destabilize it.

In 2005-2006, the Fed increased interest rates in an attempt to halt inflation.What was the most likely effect of raising interest rates on velocity?

If you believe that velocity is constant and that the aggregate supply curve is horizontal, then the quantity theory of money would predict that a doubling of the money supply would cause a doubling of the

According to the quantity theory of money, a decision on the part of all business firms currently paying employees on a monthly basis to begin paying on a weekly basis would be expected to

Advocates of fixed rules believe that politicians focus more on reelection than on sound policy.

The reason that velocity increases when interest rates rise is

How rapidly does the economy's self-correcting mechanism work? Most economists agree that it

Velocity is commonly calculated by which of the following formulas?

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?

The equation of exchange can be written as

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

_________ are more inclined to keep the government hands off the economy and favor adhering to fixed rules.

The equation of exchange is M × V = P × Y.

Historically, most harmful bubbles are characterized by

What role does ideology play in the debate on stabilization?

The inflation rate in January 2009 as measured by the CPI was zero.If inflation were to remain at zero for a long period, what would be the effect on velocity?

Describe an asset price bubble and give examples.Explain why it is extremely difficult if not impossible for the Federal Reserve to prevent such bubbles.

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

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?

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