Question 1

Which of the following is an important issue in the Keynesian-Monetarist debate?

Accepted Answer

A)  The relative importance of monetary and fiscal policy. 
B)  The nature of the transmission mechanism through which a change in the money supply affects the economy. 
C)  The shape of the investment-demand curve. 
D)  All of the above. 
A)  The relative importance of monetary and fiscal policy. 
B)  The nature of the transmission mechanism through which a change in the money supply affects the economy. 
C)  The shape of the investment-demand curve. 
D)  All of the above.

Question 2

A decrease in the money supply:

Accepted Answer

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

Question 3

The precautionary demand for money:

Accepted Answer

A)  varies inversely with the income level. 
B)  varies inversely with the price level. 
C)  is used as an insurance agent against unexpected needs. 
D)  states that nominal income must exceed real income. 
E)  is a classical concept in monetary theory. 
A)  varies inversely with the income level. 
B)  varies inversely with the price level. 
C)  is used as an insurance agent against unexpected needs. 
D)  states that nominal income must exceed real income. 
E)  is a classical concept in monetary theory.

Question 4

The velocity of money is the:

Accepted Answer

A)  rate at which the price index for consumer goods rises. 
B)  multiple by which an increase in government expenditures will cause output to expand. 
C)  average number of times a dollar is used to buy goods and services included in GDP. 
D)  number of times a dollar is taken out of the country during a year. 
A)  rate at which the price index for consumer goods rises. 
B)  multiple by which an increase in government expenditures will cause output to expand. 
C)  average number of times a dollar is used to buy goods and services included in GDP. 
D)  number of times a dollar is taken out of the country during a year.

Question 5

Assuming an inflationary gap exists, classical economists believe that flexible wages will restore full employment.

Accepted Answer

A) True 
 B)False

Question 6

A policy to do nothing and allow the economy to self-correct or adjust without interference from the federal government is also called a(n) ____ policy:

Accepted Answer

A)  nonintervention 
B)  active 
C)  stabilization 
D)  fixed rule 
A)  nonintervention 
B)  active 
C)  stabilization 
D)  fixed rule

Question 7

Classical economists traditionally believed that:

Accepted Answer

A)  there are three motives for demanding money. 
B)  a change in the money supply can affect real GDP. 
C)  the transactions demand for money influences the velocity of money. 
D)  the velocity of money is constant. 
E)  the economy does not always operate at full employment. 
A)  there are three motives for demanding money. 
B)  a change in the money supply can affect real GDP. 
C)  the transactions demand for money influences the velocity of money. 
D)  the velocity of money is constant. 
E)  the economy does not always operate at full employment.

Question 8

According to Keynesians, an increase in the money supply will have its least impact on GDP when the aggregate demand curve intersects:

Accepted Answer

A)  the horizontal portion of the aggregate supply curve. 
B)  the vertical portion of the aggregate supply curve. 
C)  the upward sloping portion of the aggregate supply curve. 
D)  either the horizontal or upward sloping portion of the aggregate supply curve. 
E)  either the horizontal or upward sloping portion of the aggregate supply curve 
A)  the horizontal portion of the aggregate supply curve. 
B)  the vertical portion of the aggregate supply curve. 
C)  the upward sloping portion of the aggregate supply curve. 
D)  either the horizontal or upward sloping portion of the aggregate supply curve. 
E)  either the horizontal or upward sloping portion of the aggregate supply curve

Question 9

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 10

Keynes called money people hold to make routine day-to-day purchases the:

Accepted Answer

A)  transactions demand for holding money. 
B)  precautionary demand for holding money. 
C)  speculative demand for holding money. 
D)  store of value demand for holding money. 
A)  transactions demand for holding money. 
B)  precautionary demand for holding money. 
C)  speculative demand for holding money. 
D)  store of value demand for holding money.

Question 11

In Keynes's view, an excess quantity of money supplied causes people to:

Accepted Answer

A)  sell bonds and the interest rate rises. 
B)  buy bonds and the interest rate falls. 
C)  buy bonds and the interest rate rises. 
D)  increase speculative balances. 
A)  sell bonds and the interest rate rises. 
B)  buy bonds and the interest rate falls. 
C)  buy bonds and the interest rate rises. 
D)  increase speculative balances.

Question 12

When the interest rate falls,

Accepted Answer

A)  the opportunity cost of holding money rises. 
B)  people shift out of holding interest-yielding bonds into holding money. 
C)  the quantity of money people will hold decreases. 
D)  investment spending decreases. 
E)  real GDP will decrease. 
A)  the opportunity cost of holding money rises. 
B)  people shift out of holding interest-yielding bonds into holding money. 
C)  the quantity of money people will hold decreases. 
D)  investment spending decreases. 
E)  real GDP will decrease.

Question 13

If V = 5, P = 100, and Q = 10, then M is:

Accepted Answer

A)  20. 
B)  10. 
C)  500. 
D)  1,000. 
E)  200. 
A)  20. 
B)  10. 
C)  500. 
D)  1,000. 
E)  200.

Question 14

Assume the demand for money curve is stationary and the Fed increases the money supply. The result is that people:

Accepted Answer

A)  increase the supply of bonds, thus driving up the interest rate. 
B)  increase the supply of bonds, thus driving down the interest rate. 
C)  increase the demand for bonds, thus driving up the interest rate. 
D)  increase the demand for bonds, thus driving down the interest rate. 
A)  increase the supply of bonds, thus driving up the interest rate. 
B)  increase the supply of bonds, thus driving down the interest rate. 
C)  increase the demand for bonds, thus driving up the interest rate. 
D)  increase the demand for bonds, thus driving down the interest rate.

Question 15

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

Accepted Answer

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

Question 16

Since classical economists believe that both V and Q are constants for an economy in short-run equilibrium, the equation of exchange becomes a theory in which:

Accepted Answer

A)  the quantity of money explains prices. 
B)  the quantity of money explains velocity. 
C)  the quantity of money explains real GDP. 
D)  changes in M cause changes in V. 
E)  prices are never flexible 
A)  the quantity of money explains prices. 
B)  the quantity of money explains velocity. 
C)  the quantity of money explains real GDP. 
D)  changes in M cause changes in V. 
E)  prices are never flexible

Question 17

Exhibit 20A-3  Macro AD/AS Model
  As shown in Exhibit 20A-3, assume the marginal propensity to consume MPC equals 0.80. Using discretionary fiscal policy, federal government spending should be ____ in order to restore the economy from E1 to full employment.

Accepted Answer

A)  increased by $2 trillion 
B)  decreased by $2 trillion 
C)  decreased by $.40 trillion 
D)  increased by $.40 trillion 
E)  increased by $.80 trillion 
A)  increased by $2 trillion 
B)  decreased by $2 trillion 
C)  decreased by $.40 trillion 
D)  increased by $.40 trillion 
E)  increased by $.80 trillion

Question 18

Why do people hold money (currency and checking account balances), and thereby forego earning interest or dividends from a financial investment?

Accepted Answer

A)  Some money is demanded for everyday transactions like parking fees, lunch, and buying groceries. 
B)  Some money is demanded as a precaution against unexpected costs such as automobile repairs, speeding tickets, or temporary loss of a job. 
C)  Some money is demanded for speculative purchases of stocks, bonds, or collectibles in case they become available at a particularly low price. 
D)  All of the above are correct. 
A)  Some money is demanded for everyday transactions like parking fees, lunch, and buying groceries. 
B)  Some money is demanded as a precaution against unexpected costs such as automobile repairs, speeding tickets, or temporary loss of a job. 
C)  Some money is demanded for speculative purchases of stocks, bonds, or collectibles in case they become available at a particularly low price. 
D)  All of the above are correct.

Question 19

Starting from equilibrium in the money market, suppose the money supply increases. Other things being equal, this will cause an excess demand for money, leading people to buy bonds.

Accepted Answer

A) True 
 B)False

Question 20

Which of the following policies would be most likely to reduce the rate of inflation?

Accepted Answer

A)  sale of government bonds by the Federal Reserve 
B)  a reduction in the discount rate 
C)  an increase in the size of the federal budget deficit 
D)  a reduction in the required reserves imposed on the banking system 
A)  sale of government bonds by the Federal Reserve 
B)  a reduction in the discount rate 
C)  an increase in the size of the federal budget deficit 
D)  a reduction in the required reserves imposed on the banking system

Exam 20: Policy Disputes Using the Self-Correcting Aggregate Demand and Supply Model

Which of the following is an important issue in the Keynesian-Monetarist debate?

A decrease in the money supply:

The precautionary demand for money:

The velocity of money is the:

Assuming an inflationary gap exists, classical economists believe that flexible wages will restore full employment.

A policy to do nothing and allow the economy to self-correct or adjust without interference from the federal government is also called a(n) ____ policy:

Classical economists traditionally believed that:

According to Keynesians, an increase in the money supply will have its least impact on GDP when the aggregate demand curve intersects:

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

Keynes called money people hold to make routine day-to-day purchases the:

In Keynes's view, an excess quantity of money supplied causes people to:

When the interest rate falls,

If V = 5, P = 100, and Q = 10, then M is:

Assume the demand for money curve is stationary and the Fed increases the money supply. The result is that people:

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

Since classical economists believe that both V and Q are constants for an economy in short-run equilibrium, the equation of exchange becomes a theory in which:

Exhibit 20A-3 Macro AD/AS Model As shown in Exhibit 20A-3, assume the marginal propensity to consume MPC equals 0.80. Using discretionary fiscal policy, federal government spending should be ____ in order to restore the economy from E1 to full employment.

Why do people hold money (currency and checking account balances), and thereby forego earning interest or dividends from a financial investment?

Starting from equilibrium in the money market, suppose the money supply increases. Other things being equal, this will cause an excess demand for money, leading people to buy bonds.

Which of the following policies would be most likely to reduce the rate of inflation?

Introducing the Economic Way of Thinking

Production Possibilities, Opportunity Cost, and Economic Growth

Market Demand and Supply

Markets in Action

Price Elasticity of Demand

Production Costs

Perfect Competition

Monopoly

Monopolistic Competition and Oligopoly

Labor Markets and Income Distribution

Gross Domestic Product

Business Cycles and Unemployment

Inflation

Aggregate Demand and Supply

Fiscal Policy

The Public Sector

Federal Deficits, Surpluses, and the National Debt

Money and the Federal Reserve System

Money Creation

International Trade and Finance

Economies in Transition

Growth and the Less-Developed Countries

Filters

Exhibit 20A-3 Macro AD/AS Model As shown in Exhibit 20A-3, assume the marginal propensity to consume MPC equals 0.80. Using discretionary fiscal policy, federal government spending should be ____ in order to restore the economy from E₁ to full employment.