Question 1

Monetarists and classical economists:

Accepted Answer

A)  assume that stimulative monetary policy will create high levels of GDP without inflation. 
B)  assume that stimulative monetary policy will create high levels of GDP and slightly high prices. 
C)  assume the economy operates at full employment and stimulative monetary policy will only cause the price level to rise. 
D)  assume that the economy operates at full employment and stimulative monetary policy will increase both aggregate supply and aggregate demand. 
E)  assume that the Keynesian description of monetary policy underestimates the true stimulative effect of an increase in the money supply. 
A)  assume that stimulative monetary policy will create high levels of GDP without inflation. 
B)  assume that stimulative monetary policy will create high levels of GDP and slightly high prices. 
C)  assume the economy operates at full employment and stimulative monetary policy will only cause the price level to rise. 
D)  assume that the economy operates at full employment and stimulative monetary policy will increase both aggregate supply and aggregate demand. 
E)  assume that the Keynesian description of monetary policy underestimates the true stimulative effect of an increase in the money supply.

Question 2

Which of the following policies could the Fed use to lower the interest rate?

Accepted Answer

A)  A tax cut. 
B)  Selling government securities. 
C)  Raising the discount rate. 
D)  Reducing the required reserve ratio. 
A)  A tax cut. 
B)  Selling government securities. 
C)  Raising the discount rate. 
D)  Reducing the required reserve ratio.

Question 3

Using the aggregate supply and demand model, assume the economy is operating along the intermediate portion of the aggregate supply curve. An increase in the money supply will increase the price level and:

Accepted Answer

A)  lower both the interest rate and real GDP. 
B)  raise both the interest rate and real GDP. 
C)  lower the interest rate and raise GDP. 
D)  raise the interest rate and lower real GDP. 
A)  lower both the interest rate and real GDP. 
B)  raise both the interest rate and real GDP. 
C)  lower the interest rate and raise GDP. 
D)  raise the interest rate and lower real GDP.

Question 4

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 5

Exhibit 20-5  Money, Investment and product markets   In Exhibit 20-5, a shift in aggregate demand from AD2 to AD3:

Accepted Answer

A)  increases real GDP, and lowers the price level. 
B)  decreases real GDP, and lowers the price level. 
C)  increases real GDP, and raises the price level. 
D)  decreases real GDP, and raises the price level. 
E)  has no effect on real GDP and the price level because the economy can never reach full employment. 
A)  increases real GDP, and lowers the price level. 
B)  decreases real GDP, and lowers the price level. 
C)  increases real GDP, and raises the price level. 
D)  decreases real GDP, and raises the price level. 
E)  has no effect on real GDP and the price level because the economy can never reach full employment.

Question 6

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 7

Monetarists argue that the Federal Reserve should allow the money supply to grow:

Accepted Answer

A)  counter to the business cycles. 
B)  faster than 10 percent annually. 
C)  only during recessions. 
D)  at a constant rate. 
A)  counter to the business cycles. 
B)  faster than 10 percent annually. 
C)  only during recessions. 
D)  at a constant rate.

Question 8

Assume the economy is experiencing an inflationary gap, classical economists believe that:

Accepted Answer

A)  flexible wages will restore full employment. 
B)  the federal government should decrease spending to shift the aggregate demand curve leftward. 
C)  the Federal Reserve should lower the interest rate. 
D)  the federal government should increase spending to shift the aggregate demand curve rightward. 
A)  flexible wages will restore full employment. 
B)  the federal government should decrease spending to shift the aggregate demand curve leftward. 
C)  the Federal Reserve should lower the interest rate. 
D)  the federal government should increase spending to shift the aggregate demand curve rightward.

Question 9

Monetarists argue that the Fed should frequently adjust the money supply in response to ever-changing economic conditions.

Accepted Answer

A) True 
 B)False

Question 10

Assume the economy is operating at a real GDP above full-employment real GDP. Keynesian economists would prescribe which of the following policies?

Accepted Answer

A)  Nonintervention 
B)  Fixed rule 
C)  Contractionary 
D)  Expansionary 
A)  Nonintervention 
B)  Fixed rule 
C)  Contractionary 
D)  Expansionary

Question 11

In a two-asset economy with money and T-bills, the quantity of money that people will want to hold, other things being equal, can be expected to:

Accepted Answer

A)  decrease as real GDP increases. 
B)  increase as the interest rate decreases. 
C)  increase as the interest rate increases. 
D)  all of the above. 
A)  decrease as real GDP increases. 
B)  increase as the interest rate decreases. 
C)  increase as the interest rate increases. 
D)  all of the above.

Question 12

If the Fed uses its tools to expand the money supply, bond prices will be bid down and interest rates will rise.

Accepted Answer

A) True 
 B)False

Question 13

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

Accepted Answer

A) True 
 B)False

Question 14

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 15

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 16

Keynes called the money people hold in order to buy bonds, stocks, or other nonmoney financial assets the:

Accepted Answer

A)  transactions demand for holding money. 
B)  precautionary demand for holding money. 
C)  speculative demand for holding money. 
D)  unit of account demand for holding money. 
A)  transactions demand for holding money. 
B)  precautionary demand for holding money. 
C)  speculative demand for holding money. 
D)  unit of account demand for holding money.

Question 17

Most monetarists favor:

Accepted Answer

A)  frequent changes in the growth rate of the money supply to avoid inflation. 
B)  placing the Federal Reserve under the Treasury. 
C)  a steady, gradual shrinkage of the money supply. 
D)  a constant increase in the money supply year after year equal to the potential annual growth rate in real GDP. 
A)  frequent changes in the growth rate of the money supply to avoid inflation. 
B)  placing the Federal Reserve under the Treasury. 
C)  a steady, gradual shrinkage of the money supply. 
D)  a constant increase in the money supply year after year equal to the potential annual growth rate in real GDP.

Question 18

While the classicists believed that both velocity and output are stable, Keynesians believe:

Accepted Answer

A)  velocity is stable and output is variable. 
B)  velocity and output are both variable. 
C)  output is stable and velocity is variable 
D)  the same as the classical economists that both output and velocity are stable 
E)  at low levels of income both velocity and output are stable, but at high levels of income velocity becomes variable. 
A)  velocity is stable and output is variable. 
B)  velocity and output are both variable. 
C)  output is stable and velocity is variable 
D)  the same as the classical economists that both output and velocity are stable 
E)  at low levels of income both velocity and output are stable, but at high levels of income velocity becomes variable.

Question 19

According to the Monetarist view, the impact of expansionary monetary policy will be:

Accepted Answer

A)  the same in the long run as in the short run. 
B)  the same regardless of whether the effects of the policy are anticipated or unanticipated. 
C)  a higher price level (inflation). 
D)  a decrease in short-run prices and an increase in long-run prices. 
A)  the same in the long run as in the short run. 
B)  the same regardless of whether the effects of the policy are anticipated or unanticipated. 
C)  a higher price level (inflation). 
D)  a decrease in short-run prices and an increase in long-run prices.

Question 20

If the money supply increases this will cause the interest rate to rise, investment to fall and GDP to fall.

Accepted Answer

A) True 
 B)False

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

Monetarists and classical economists:

Which of the following policies could the Fed use to lower the interest rate?

Using the aggregate supply and demand model, assume the economy is operating along the intermediate portion of the aggregate supply curve. An increase in the money supply will increase the price level and:

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

Exhibit 20-5 Money, Investment and product markets In Exhibit 20-5, a shift in aggregate demand from AD2 to AD3:

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.

Monetarists argue that the Federal Reserve should allow the money supply to grow:

Assume the economy is experiencing an inflationary gap, classical economists believe that:

Monetarists argue that the Fed should frequently adjust the money supply in response to ever-changing economic conditions.

Assume the economy is operating at a real GDP above full-employment real GDP. Keynesian economists would prescribe which of the following policies?

In a two-asset economy with money and T-bills, the quantity of money that people will want to hold, other things being equal, can be expected to:

If the Fed uses its tools to expand the money supply, bond prices will be bid down and interest rates will rise.

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

According to the classical view,

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

Keynes called the money people hold in order to buy bonds, stocks, or other nonmoney financial assets the:

Most monetarists favor:

While the classicists believed that both velocity and output are stable, Keynesians believe:

According to the Monetarist view, the impact of expansionary monetary policy will be:

If the money supply increases this will cause the interest rate to rise, investment to fall and GDP to fall.

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 20-5 Money, Investment and product markets In Exhibit 20-5, a shift in aggregate demand from AD₂ to AD₃: