Question 1

If nominal GDP is $7 trillion, and the money supply is $2 trillion, then what is the velocity of money?

Accepted Answer

A) 14. 
B) 7. 
C) 3.5. 
D) 2. 
A) 14. 
B) 7. 
C) 3.5. 
D) 2.

Question 2

If the investment curve is relatively vertical, the Keynesian conclusion is that the transmission mechanism has little effect on the economy.

Accepted Answer

A) True 
 B)False

Question 3

Contrast the Keynesian and Monetarist views on the effectiveness of fiscal policy.

Accepted Answer

Keynesians believe the aggregate supply

Question 4

If at the prevailing interest rate the quantity of money demanded is $2 trillion, and the supply of money is $1.5 trillion, then which of the following is true ?

Accepted Answer

A) There is a shortage of money, and consequently interest rates must fall in order to achieve an equilibrium in the money market. 
B) There is a surplus of money, and consequently interest rates must fall in order to achieve an equilibrium in the money market. 
C) There is shortage of money, and consequently interest rates must rise in order to achieve an equilibrium in the money market. 
D) There is a surplus of money, and consequently interest rates must rise in order to achieve an equilibrium in the money market. 
A) There is a shortage of money, and consequently interest rates must fall in order to achieve an equilibrium in the money market. 
B) There is a surplus of money, and consequently interest rates must fall in order to achieve an equilibrium in the money market. 
C) There is shortage of money, and consequently interest rates must rise in order to achieve an equilibrium in the money market. 
D) There is a surplus of money, and consequently interest rates must rise in order to achieve an equilibrium in the money market.

Question 5

In the quantity theory of money:

Accepted Answer

A) the price level is a function of the supply of money. 
B) the supply of money is a function of the price level. 
C) the money supply and the price level are inversely related. 
D) the money supply is controlled by the government. 
A) the price level is a function of the supply of money. 
B) the supply of money is a function of the price level. 
C) the money supply and the price level are inversely related. 
D) the money supply is controlled by the government.

Question 6

The Monetarist transmission mechanism through which monetary policy affects the price level, real GDP, and employment depends on the:

Accepted Answer

A) indirect impact of changes on the interest rate. 
B) indirect impact of changes on profit expectations. 
C) direct impact of changes in fiscal policy on aggregate demand. 
D) direct impact of changes in the money supply on aggregate demand. 
A) indirect impact of changes on the interest rate. 
B) indirect impact of changes on profit expectations. 
C) direct impact of changes in fiscal policy on aggregate demand. 
D) direct impact of changes in the money supply on aggregate demand.

Question 7

The assumption that the velocity of money and the quantity being produced is constant is held by the:

Accepted Answer

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

Question 8

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

Accepted Answer

A) True 
 B)False

Question 9

Exhibit 16-2 Money market demand and supply curves   As shown in Exhibit 16-2, assume the money supply curve shifts rightward from MS1 to MS2 and the economy is operating along the intermediate segment of the aggregate supply curve. The result will be a:

Accepted Answer

A) higher interest rate and no effect on real GDP or the price level. 
B) lower investment, lower real GDP, and lower price level. 
C) higher investment, higher real GDP, and higher price level. 
D) higher investment, lower real GDP, and lower price level. 
A) higher interest rate and no effect on real GDP or the price level. 
B) lower investment, lower real GDP, and lower price level. 
C) higher investment, higher real GDP, and higher price level. 
D) higher investment, lower real GDP, and lower price level.

Question 10

According to the classical view,

Accepted Answer

A) velocity is constant, which means changes in price will cause changes in price or quantity. 
B) quantity is constant, which means changes in the money supply could cause either changes in velocity or changes in prices. 
C) velocity and price are constant so that changes in the money supply causes changes in quantity. 
D) velocity and quantity are constant so that changes in the money supply cause changes in prices. 
E) velocity is constant while quantity is variable so that changes in the money supply change both price and quantity. 
A) velocity is constant, which means changes in price will cause changes in price or quantity. 
B) quantity is constant, which means changes in the money supply could cause either changes in velocity or changes in prices. 
C) velocity and price are constant so that changes in the money supply causes changes in quantity. 
D) velocity and quantity are constant so that changes in the money supply cause changes in prices. 
E) velocity is constant while quantity is variable so that changes in the money supply change both price and quantity.

Question 11

A decrease in the money supply:

Accepted Answer

A) raises the interest rate, causing an increase in investment and an increase in GDP. 
B) lowers the interest rate, causing an increase in investment and an increase in GDP. 
C) raises the interest rate, causing a decrease in investment and a decrease in GDP. 
D) lowers the interest rate, causing a decrease in investment and an increase in GDP. 
E) lowers the interest rate, causing a decrease in investment and a decrease in GDP. 
A) raises the interest rate, causing an increase in investment and an increase in GDP. 
B) lowers the interest rate, causing an increase in investment and an increase in GDP. 
C) raises the interest rate, causing a decrease in investment and a decrease in GDP. 
D) lowers the interest rate, causing a decrease in investment and an increase in GDP. 
E) lowers the interest rate, causing a decrease in investment and a decrease in GDP.

Question 12

Assume a fixed demand for money curve and the Fed increases the money supply. The result is a temporary:

Accepted Answer

A) excess quantity of money demanded. 
B) excess quantity of money supplied. 
C) new equilibrium interest rate. 
D) decrease in the demand for loans. 
A) excess quantity of money demanded. 
B) excess quantity of money supplied. 
C) new equilibrium interest rate. 
D) decrease in the demand for loans.

Question 13

Exhibit 16-2 Money market demand and supply curves   Starting from an equilibrium at E1 in Exhibit 16-2, a rightward shift of the money supply curve from MS1 to MS2 would cause an excess:

Accepted Answer

A) demand for money, leading people to sell bonds. 
B) supply of money, leading people to buy bonds. 
C) supply of money, leading people to sell bonds. 
D) demand for money, leading people to buy bonds. 
A) demand for money, leading people to sell bonds. 
B) supply of money, leading people to buy bonds. 
C) supply of money, leading people to sell bonds. 
D) demand for money, leading people to buy bonds.

Question 14

Exhibit 16-6 Money, investment and product markets   In Exhibit 16-6, a move from MS1 to MS2:

Accepted Answer

A) increases the money supply, causing the interest rate to rise from i2 to i1. 
B) increases the money supply, causing the interest rate to fall from i1 to i2. 
C) decreases the money supply, causing the interest rate to rise from i2 to i1. 
D) decreases the money supply, causing the interest rate to fall from i1 to i2. 
E) has no effect on the money supply or the interest rate. 
A) increases the money supply, causing the interest rate to rise from i2 to i1. 
B) increases the money supply, causing the interest rate to fall from i1 to i2. 
C) decreases the money supply, causing the interest rate to rise from i2 to i1. 
D) decreases the money supply, causing the interest rate to fall from i1 to i2. 
E) has no effect on the money supply or the interest rate.

Question 15

Keynesian economists believe monetary policy is more effective than fiscal policy in stabilizing the business cycle.

Accepted Answer

A) True 
 B)False

Question 16

The equation of exchange states that:

Accepted Answer

A) money supply multiplied by real output equals velocity. 
B) velocity multiplied by money supply equals the selling price times the quantity of actual output. 
C) money supply divided by velocity equals nominal GDP. 
D) money supply divided by velocity equals real GDP. 
A) money supply multiplied by real output equals velocity. 
B) velocity multiplied by money supply equals the selling price times the quantity of actual output. 
C) money supply divided by velocity equals nominal GDP. 
D) money supply divided by velocity equals real GDP.

Question 17

Discuss the determinants of the equilibrium interest rate and how it may change. What can the Fed do to change the interest rate?

Accepted Answer

The interest rate is determined through

Question 18

According to Keynesian theory, changes in the money supply have a direct and immediate impact on aggregate demand.

Accepted Answer

A) True 
 B)False

Question 19

The equation of exchange states:

Accepted Answer

A) MV = PQ. 
B) MP = VQ. 
C) MP = V\Q. 
D) V = M\PQ. 
A) MV = PQ. 
B) MP = VQ. 
C) MP = V\Q. 
D) V = M\PQ.

Question 20

Monetarists believe:

Accepted Answer

A) the cause-and-effect relationship hypothesized by the Keynesians understates the impact of stimulative monetary policy. 
B) the cause-and-effect relationship hypothesized by the Keynesians is an accurate description of how monetary policy works. 
C) since the economy is operating at full employment, any stimulative monetary policy will cause the inflation rate to rise. 
D) the cause-and-effect relationship hypothesized by the Keynesians is backwards, and decreases in the money supply actually stimulate economic activity. 
E) the cause-and-effect relationship hypothesized by Keynesians will not work because investment does not respond to changes in interest rates. 
A) the cause-and-effect relationship hypothesized by the Keynesians understates the impact of stimulative monetary policy. 
B) the cause-and-effect relationship hypothesized by the Keynesians is an accurate description of how monetary policy works. 
C) since the economy is operating at full employment, any stimulative monetary policy will cause the inflation rate to rise. 
D) the cause-and-effect relationship hypothesized by the Keynesians is backwards, and decreases in the money supply actually stimulate economic activity. 
E) the cause-and-effect relationship hypothesized by Keynesians will not work because investment does not respond to changes in interest rates.

Exam 16: Monetary Policy

If nominal GDP is $7 trillion, and the money supply is $2 trillion, then what is the velocity of money?

If the investment curve is relatively vertical, the Keynesian conclusion is that the transmission mechanism has little effect on the economy.

Contrast the Keynesian and Monetarist views on the effectiveness of fiscal policy.

If at the prevailing interest rate the quantity of money demanded is $2 trillion, and the supply of money is $1.5 trillion, then which of the following is true ?

In the quantity theory of money:

The Monetarist transmission mechanism through which monetary policy affects the price level, real GDP, and employment depends on the:

The assumption that the velocity of money and the quantity being produced is constant is held by the:

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

Exhibit 16-2 Money market demand and supply curves As shown in Exhibit 16-2, assume the money supply curve shifts rightward from MS1 to MS2 and the economy is operating along the intermediate segment of the aggregate supply curve. The result will be a:

According to the classical view,

A decrease in the money supply:

Assume a fixed demand for money curve and the Fed increases the money supply. The result is a temporary:

Exhibit 16-2 Money market demand and supply curves Starting from an equilibrium at E1 in Exhibit 16-2, a rightward shift of the money supply curve from MS1 to MS2 would cause an excess:

Exhibit 16-6 Money, investment and product markets In Exhibit 16-6, a move from MS1 to MS2:

Keynesian economists believe monetary policy is more effective than fiscal policy in stabilizing the business cycle.

The equation of exchange states that:

Discuss the determinants of the equilibrium interest rate and how it may change. What can the Fed do to change the interest rate?

According to Keynesian theory, changes in the money supply have a direct and immediate impact on aggregate demand.

The equation of exchange states:

Monetarists believe:

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 16-2 Money market demand and supply curves As shown in Exhibit 16-2, assume the money supply curve shifts rightward from MS₁ to MS₂ and the economy is operating along the intermediate segment of the aggregate supply curve. The result will be a:

Exhibit 16-2 Money market demand and supply curves Starting from an equilibrium at E₁ in Exhibit 16-2, a rightward shift of the money supply curve from MS₁ to MS₂ would cause an excess:

Exhibit 16-6 Money, investment and product markets In Exhibit 16-6, a move from MS₁ to MS₂: