Question 1

According to the quantity theory of money, which one of the following economic variables would change in response to an increase in the money supply?

Accepted Answer

A)   prices
B)   real income
C)   velocity
D)   employmentE) A) and B)
F) None of the above

Question 2

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.E) B) and D)
F) C) and D)

Question 3

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.E) A) and D)
F) B) and D)

Question 4

Which economic theory argues that changes in velocity are predictable and the crowding-out effect is substantial?

Accepted Answer

A)   classical theory
B)   Keynesian theory
C)   monetarist theory
D)   Marxist theoryE) C) and D)
F) A) and C)

Question 5

Exhibit 20A-2 Macro AD/AS Models
1 and price level P2. If the federal government or Fed decides to intervene, it would most likely: A)  increase taxes. B)  decrease the money supply. C)  increase the level of government spending for goods and services. D)  decrease the level of government spending for goods and services." class="answers-bank-image d-inline" rel="preload" >
In Panel (a)  of Exhibit 20A-2, the economy is initially in short-run equilibrium at real GDP level Y1 and price level P2. If the federal government or Fed decides to intervene, it would most likely:

Accepted Answer

A)   increase taxes.
B)   decrease the money supply.
C)   increase the level of government spending for goods and services.
D)   decrease the level of government spending for goods and services.E) All of the above
F) None of the above

Question 6

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

Accepted Answer

A)   nonintervention
B)   active monetary policy
C)   contractionary
D)   expansionaryE) A) and B)
F) All of the above

Question 7

When the Fed increases the money supply, interest rates:

Accepted Answer

A)   rise.
B)   fall.
C)   are unaffected.
D)   rise and then fall.E) B) and C)
F) A) and B)

Question 8

Exhibit 20-5 Money, investment and product markets
1 to MS2, the equilibrium interest rate: A)  decreases from i1 to i2, decreasing investment spending from I2 to I1. B)  increases from i2 to i1, increasing investment spending from I1 to I2. C)  increases from i2 to i1, decreasing investment spending from I2 to I1. D)  decreases from i1 to i2, increasing investment spending from I1 to I2." class="answers-bank-image d-inline" rel="preload" >
In Exhibit 20-5, when the money supply increases from MS1 to MS2, the equilibrium interest rate:

Accepted Answer

A)   decreases from i1 to i2, decreasing investment spending from I2 to I1.
B)   increases from i2 to i1, increasing investment spending from I1 to I2.
C)   increases from i2 to i1, decreasing investment spending from I2 to I1.
D)   decreases from i1 to i2, increasing investment spending from I1 to I2.E) C) and D)
F) B) and C)

Question 9

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.E) None of the above
F) A) and D)

Question 10

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.E) C) and D)
F) A) and C)

Question 11

When the Fed reduces the money supply, it will cause a decrease in aggregate demand because:

Accepted Answer

A)   real rates will rise, lowering business investment and consumer spending.
B)   the dollar will depreciate on the foreign exchange market, leading to an increase in net exports.
C)   lower interest rates will cause the value of assets (for example, stocks)  to rise.
D)   the national debt will increase, causing consumers to reduce their spending.E) A) and B)
F) All of the above

Question 12

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) C) and D)
F) B) and C)

Question 13

The quantity theory of money of the Classical economists says that a change in the money supply will produce a:

Accepted Answer

A)   proportional change in the price level.
B)   greater than proportional change in the price level.
C)   less than proportional change in the price level.
D)   wide variation in the velocity of money.E) B) and C)
F) C) and D)

Question 14

According to the quantity theory of money, if M's growth is lower than Q's, then:

Accepted Answer

A)   V falls.
B)   V rises.
C)   P rises.
D)   P falls.E) B) and C)
F) A) and D)

Question 15

According to monetarists, which of the following would be most important for the control of inflation?

Accepted Answer

A)   a steady increase in federal expenditures
B)   the imposition of price controls
C)   keeping the growth rate of the money supply low and steady
D)   a steady increase in the size of the budget deficitE) B) and D)
F) All of the above

Question 16

Exhibit 20-3 Money market demand and supply curves
1 to MS2 and the economy is operating along the intermediate segment of the aggregate supply curve. The result will be a: A)  higher investment, lower real GDP, and lower price level. B)  lower investment, lower real GDP, and lower price level. C)  higher investment, higher real GDP, and higher price level. D)  higher interest rate and no effect on real GDP or the price level." class="answers-bank-image d-inline" rel="preload" >
As shown in Exhibit 20-3, 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 investment, lower real GDP, and lower price level.
B)   lower investment, lower real GDP, and lower price level.
C)   higher investment, higher real GDP, and higher price level.
D)   higher interest rate and no effect on real GDP or the price level.E) All of the above
F) B) and D)

Question 17

Exhibit 20-1 Money market demand and supply curves
1 in Exhibit 20-1, a leftward shift of the money supply curve from MS1 to MS2 would cause an excess: A)  demand for money, leading people to sell bonds. B)  demand for money, leading people to buy bonds. C)  supply of money, leading people to sell bonds. D)  supply of money, leading people to buy bonds." class="answers-bank-image d-inline" rel="preload" >
Starting from an equilibrium at E1 in Exhibit 20-1, a leftward 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)   demand for money, leading people to buy bonds.
C)   supply of money, leading people to sell bonds.
D)   supply of money, leading people to buy bonds.E) All of the above
F) B) and C)

Question 18

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) B) and C)
F) All of the above

Question 19

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)   classical school.
D)   rational expectations school.E) None of the above
F) A) and C)

Question 20

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.E) C) and D)
F) B) and D)

Exam 20: Monetary Policy

Which economic theory argues that changes in velocity are predictable and the crowding-out effect is substantial?

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

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The quantity theory of money of the Classical economists says that a change in the money supply will produce a:

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According to the quantity theory of money, if M's growth is lower than Q's, then:

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Monetarists believe:

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Exhibit 20-5 Money, investment and product markets In Exhibit 20-5, when the money supply increases from MS1 to MS2, the equilibrium interest rate:

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

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According to monetarists, which of the following would be most important for the control of inflation?

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

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Exhibit 20-3 Money market demand and supply curves As shown in Exhibit 20-3, 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:

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Monetarists and classical economists:

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

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According to the quantity theory of money, which one of the following economic variables would change in response to an increase in the money supply?

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Exhibit 20-1 Money market demand and supply curves Starting from an equilibrium at E1 in Exhibit 20-1, a leftward shift of the money supply curve from MS1 to MS2 would cause an excess:

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Exhibit 20A-2 Macro AD/AS Models In Panel (a) of Exhibit 20A-2, the economy is initially in short-run equilibrium at real GDP level Y1 and price level P2. If the federal government or Fed decides to intervene, it would most likely:

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

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When the Fed reduces the money supply, it will cause a decrease in aggregate demand because:

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

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When the Fed increases the money supply, interest rates:

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

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Exhibit 20-5 Money, investment and product markets In Exhibit 20-5, when the money supply increases from MS₁ to MS₂, the equilibrium interest rate:

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Exhibit 20-3 Money market demand and supply curves As shown in Exhibit 20-3, 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:

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Exhibit 20-1 Money market demand and supply curves Starting from an equilibrium at E₁ in Exhibit 20-1, a leftward shift of the money supply curve from MS₁ to MS₂ would cause an excess:

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Exhibit 20A-2 Macro AD/AS Models In Panel (a) of Exhibit 20A-2, the economy is initially in short-run equilibrium at real GDP level Y₁ and price level P₂. If the federal government or Fed decides to intervene, it would most likely:

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