Question 1

Classical economists believe that:

Accepted Answer

A) velocity is not constant. 
B) changes in the money supply affect real GDP. 
C) the quantity of money explains prices. 
D) the money supply affects velocity. 
A) velocity is not constant. 
B) changes in the money supply affect real GDP. 
C) the quantity of money explains prices. 
D) the money supply affects velocity.

Question 2

The belief that the velocity of money is not constant but highly predictable is associated with the:

Accepted Answer

A) classical school. 
B) Keynesian school. 
C) supply-side school. 
D) rational expectations school 
E) monetarist school. 
A) classical school. 
B) Keynesian school. 
C) supply-side school. 
D) rational expectations school 
E) monetarist school.

Question 3

Which of the following statements is true ?

Accepted Answer

A) The speculative demand for money at possible interest rates gives the demand for money curve its upward slope. 
B) There is an inverse relationship between the quantity of money demanded and the interest rate. 
C) According to the quantity theory of money, any change in the money supply will have no effect on the price level. 
D) All of these. 
A) The speculative demand for money at possible interest rates gives the demand for money curve its upward slope. 
B) There is an inverse relationship between the quantity of money demanded and the interest rate. 
C) According to the quantity theory of money, any change in the money supply will have no effect on the price level. 
D) All of these.

Question 4

The number of times per year each dollar is used to transact an exchange is the:

Accepted Answer

A) quantity theory of money. 
B) velocity of money. 
C) equation of exchange. 
D) turnover rate. 
E) expenditure rate. 
A) quantity theory of money. 
B) velocity of money. 
C) equation of exchange. 
D) turnover rate. 
E) expenditure rate.

Question 5

Exhibit 16-4 Aggregate demand and supply model   In Exhibit 16-4, which one of the following actions could the Fed use to shift the AD curve from AD3 to AD2?

Accepted Answer

A) Lower the legal reserve requirement. 
B) Lower the discount rate. 
C) Lower the federal funds rate. 
D) Raise the discount rate. 
E) Buy government securities. 
A) Lower the legal reserve requirement. 
B) Lower the discount rate. 
C) Lower the federal funds rate. 
D) Raise the discount rate. 
E) Buy government securities.

Question 6

Given the strict quantity theory of money, if the quantity of money doubled, prices would:

Accepted Answer

A) fall by half. 
B) double. 
C) remain constant. 
D) increase somewhat but less than double. 
A) fall by half. 
B) double. 
C) remain constant. 
D) increase somewhat but less than double.

Question 7

The transactions demand for holding money is when people hold money:

Accepted Answer

A) instead of near money. 
B) to transact purchases they expect to make. 
C) as insurance against unexpected expenses. 
D) to speculate in the stock market. 
E) to take advantage of changes in interest rates. 
A) instead of near money. 
B) to transact purchases they expect to make. 
C) as insurance against unexpected expenses. 
D) to speculate in the stock market. 
E) to take advantage of changes in interest rates.

Question 8

Starting from a position of macroeconomic equilibrium at below the full-employment level of real GDP, an increase in the money supply will:

Accepted Answer

A) raise interest rates, prices, and reduce real GDP. 
B) raise interest rates, lower prices, and leave real GDP unchanged. 
C) lower interest rates, raise prices, and increase real GDP. 
A) raise interest rates, prices, and reduce real GDP. 
B) raise interest rates, lower prices, and leave real GDP unchanged. 
C) lower interest rates, raise prices, and increase real GDP.

Question 9

People learn to hold a specific quantity of money for the groceries, theater tickets, gasoline, clothes, film, and other items they habitually purchase. This behavior is representative of the:

Accepted Answer

A) precautionary demand. 
B) speculative demand. 
C) transactions demand. 
D) volatility demand. 
E) liquidity demand. 
A) precautionary demand. 
B) speculative demand. 
C) transactions demand. 
D) volatility demand. 
E) liquidity demand.

Question 10

Classical economists believe that an increase in the money supply will lead to:

Accepted Answer

A) only c and d. 
B) all of the following. 
C) an increase in the price level. 
D) an increase in nominal GDP. 
E) an increase in real GDP. 
A) only c and d. 
B) all of the following. 
C) an increase in the price level. 
D) an increase in nominal GDP. 
E) an increase in real GDP.

Question 11

According to the monetarists, which of the following is true?

Accepted Answer

A) Instability in the money supply is the primary cause of economic instability. 
B) A reduction in the money supply will cause consumers to increase spending. 
C) A reduction in the money supply will cause a proportional reduction in wages and prices, leaving output unchanged. 
D) A rapid growth rate of the money supply will lead to a rapid growth rate of real GDP. 
A) Instability in the money supply is the primary cause of economic instability. 
B) A reduction in the money supply will cause consumers to increase spending. 
C) A reduction in the money supply will cause a proportional reduction in wages and prices, leaving output unchanged. 
D) A rapid growth rate of the money supply will lead to a rapid growth rate of real GDP.

Question 12

Exhibit 16-1 Money market demand and supply curves   Beginning from an equilibrium at E1 in Exhibit 16-1, a decrease in the money supply from $150 billion to $100 billion causes people to:

Accepted Answer

A) sell bonds and drive the price of bonds down. 
B) sell bonds and drive the price of bonds up. 
C) buy bonds and drive the price of bonds down. 
D) buy bonds and drive the price of bonds up. 
A) sell bonds and drive the price of bonds down. 
B) sell bonds and drive the price of bonds up. 
C) buy bonds and drive the price of bonds down. 
D) buy bonds and drive the price of bonds up.

Question 13

The Monetarists advocate the monetary rule in order to stabilize the business cycle which states that the money supply should be increased by a constant rate year after year.

Accepted Answer

A) True 
 B)False

Question 14

If the money supply is $250 billion and nominal GDP is $1 trillion, the velocity of money is:

Accepted Answer

A) 0.25. 
B) 0.40. 
C) 2.50. 
D) 4.00. 
A) 0.25. 
B) 0.40. 
C) 2.50. 
D) 4.00.

Question 15

Keynesian economists argue that the velocity of money is unstable and has unpredictable variations.

Accepted Answer

A) True 
 B)False

Question 16

The money that households might hold either as money or in interest-bearing assets, depending on the interest rate, is called the:

Accepted Answer

A) precautionary demand. 
B) transactions demand. 
C) speculative demand. 
D) liquidity motive. 
E) investment motive. 
A) precautionary demand. 
B) transactions demand. 
C) speculative demand. 
D) liquidity motive. 
E) investment motive.

Question 17

According to the Monetarists, the primary cause of inflation is:

Accepted Answer

A) large budget deficits. 
B) high taxes. 
C) rapid expansion of the money supply. 
D) government expenditures that are large relative to the size of the economy. 
A) large budget deficits. 
B) high taxes. 
C) rapid expansion of the money supply. 
D) government expenditures that are large relative to the size of the economy.

Question 18

Causality is clear and mechanical with the quantity theory of money. If M increases because:

Accepted Answer

A) V and Q are variable, the price level, P, increases. 
B) V and Q are variable, the price level, P, decreases. 
C) V and Q are constant, the price level, P, increases. 
D) V and Q are constant, the price level, P, decreases. 
E) P and Q are constant, velocity, V, increases. 
A) V and Q are variable, the price level, P, increases. 
B) V and Q are variable, the price level, P, decreases. 
C) V and Q are constant, the price level, P, increases. 
D) V and Q are constant, the price level, P, decreases. 
E) P and Q are constant, velocity, V, increases.

Question 19

Bond prices and interest rates are directly related.

Accepted Answer

A) True 
 B)False

Question 20

Monetarists argue that fiscal policy is ineffective because:

Accepted Answer

A) the velocity of money is predictable. 
B) the crowding-out effect reduces investment. 
C) prices and wages are sticky in the short run. 
D) it causes the value of the dollar to depreciate. 
A) the velocity of money is predictable. 
B) the crowding-out effect reduces investment. 
C) prices and wages are sticky in the short run. 
D) it causes the value of the dollar to depreciate.

Exam 16: Monetary Policy

Classical economists believe that:

The belief that the velocity of money is not constant but highly predictable is associated with the:

Which of the following statements is true ?

The number of times per year each dollar is used to transact an exchange is the:

Exhibit 16-4 Aggregate demand and supply model In Exhibit 16-4, which one of the following actions could the Fed use to shift the AD curve from AD3 to AD2?

Given the strict quantity theory of money, if the quantity of money doubled, prices would:

The transactions demand for holding money is when people hold money:

Starting from a position of macroeconomic equilibrium at below the full-employment level of real GDP, an increase in the money supply will:

People learn to hold a specific quantity of money for the groceries, theater tickets, gasoline, clothes, film, and other items they habitually purchase. This behavior is representative of the:

Classical economists believe that an increase in the money supply will lead to:

According to the monetarists, which of the following is true?

Exhibit 16-1 Money market demand and supply curves Beginning from an equilibrium at E1 in Exhibit 16-1, a decrease in the money supply from $150 billion to $100 billion causes people to:

The Monetarists advocate the monetary rule in order to stabilize the business cycle which states that the money supply should be increased by a constant rate year after year.

If the money supply is $250 billion and nominal GDP is $1 trillion, the velocity of money is:

Keynesian economists argue that the velocity of money is unstable and has unpredictable variations.

The money that households might hold either as money or in interest-bearing assets, depending on the interest rate, is called the:

According to the Monetarists, the primary cause of inflation is:

Causality is clear and mechanical with the quantity theory of money. If M increases because:

Bond prices and interest rates are directly related.

Monetarists argue that fiscal policy is ineffective because:

Introducing the Economic Way of Thinking

Production Possibilities, Opportunity Cost, and Economic Growth

Market Demand and Supply

Markets in Action

Gross Domestic Product

Business Cycles and Unemployment

Inflation

The Keynesian Model

The Keynesian Model in Action

Aggregate Demand and Supply

Fiscal Policy

The Public Sector

Federal Deficits, Surpluses, and the National Debt

Money and the Federal Reserve System

Money Creation

The Phillips Curve and Expectations Theory

International Trade and Finance

Economies in Transition

Growth and the Less-Developed Countries

Applying Graphs to Economics

Consumer Surplus, Producer Surplus, and Market Efficiency

the Self-Correcting Aggregate Demand and Supply Model

Policy Disputes Using the Self-Correcting Aggregate Demand and Supply Model

Filters

Exhibit 16-4 Aggregate demand and supply model In Exhibit 16-4, which one of the following actions could the Fed use to shift the AD curve from AD₃ to AD₂?

Exhibit 16-1 Money market demand and supply curves Beginning from an equilibrium at E₁ in Exhibit 16-1, a decrease in the money supply from $150 billion to $100 billion causes people to: