Deck 4: Classical Macroeconomics II: Money,prices,and Interest

Question 1

Consider the impact of an increase in labor-enhancing technology within the classical model.Provide graphs to illustrate what happens to real wages,labor,output,and the price level.

Answer 1

An increase in labor-enhancing technology will shift the production function upwards,which will increase labor demand and increase the real wage.This will increase the aggregate supply curve,which increases output and reduces the price level.

Question 2

What does the Classical model predict about the relationship between a country's budget balance (total revenue minus total spending)and a country's level of real interest rates and investment in a closed economy? Use a graph of the capital market to illustrate.

Answer 2

A higher budget deficit shifts the I+(G-T)curve to the right,increasing real interest rates.Higher real interest rates lead to a reduction in the quantity demanded of investment.

Question 3

Two countries are experiencing 10% money growth a year.However,country A is growing at 2% and country B is growing at 5%.Which country will have the higher inflation rate?

Answer 3

According to the quantity theory,countries with a higher level of output will have a lower price level holding the money supply and velocity constant.As a result,the faster growing country will experience lower inflation.

Question 4

Why do people hold money in the classical model?

Question 5

According to the quantity theory of money,the quantity of money determines the

A)interest rate.
B)level of real output.
C)price level.
D)level of employment.

Question 6

Explain the intuition behind why the aggregate demand curve is downward sloping.Why does an increase in the money supply shift the aggregate demand curve to the right?

Question 7

In the equilibrium version of the classical model,the velocity of money

A)depends on the real rate of interest.
B)depends on the level of employment.
C)is equal to the Cambridge k.
D)is stable in the short run.

Question 8

What is the difference between savings and investment?

Question 9

In the classical model,a rise in the marginal income tax rate would

A)cause the price level to rise and the level of real output to fall.
B)cause the price level and the level of real output to both fall.
C)cause the price level to rise with no effect on real output.
D)leave both real output and the price level unchanged.

Question 10

According to the quantity theory of money,a 10-percent increase in the money stock would lead to a 10-percent rise in the

A)the money wage and the price level.
B)level of real GNP.
C)level of nominal GNP.
D)the money wage and the price level,but the price level rises by more
E)Both a and c

Question 11

During the recession of 2008,the U.S.experienced lower real interest rates at the same time investment and GDP were falling.How would a Classical economist explain this recession? Provide a graph of the Classical capital market to illustrate your arguments.

Question 12

The Fisherian version of the quantity theory equation is

A)MV = Py. b y = c + i +
C)M = kPy.
D)s = i + (g - t).
G)

Question 13

The classical model predicts that,in the short-run,a tax cut financed by an increase in the money supply would

A)leave output and the price level unchanged.
B)increase the price level but leave output unchanged.
C)increase output but and reduce the price level.
D)increase output and the price level by increasing aggregate demand.
E)None of the above.

Question 14

In the classical model,the level of business investment was a function of

A)only the expected profitability of investment projects.
B)only the real interest rate.
C)both the expected profitability of investment projects and the real interest rate.
D)None of the above
D)only the nominal interest rate.

Question 15

In the classical model,an increase in saving is assumed to increase

A)the demand for loanable funds,which decreases interest rates.
B)the supply of loanable funds,which decreases interest rates.
C)both the demand for money and loanable funds,which reduces interest rates.
D)neither the demand for money nor bonds,leaving interest rates unchanged.

Question 16

Contrast the Cambridge and Fisher versions of the quantity theory.Explain why the Cambridge version of the quantity theory represents a more modern monetary theory when compared to Fisher's version.

Question 17

The quantity theory of money implies that if the money stock were to double,the price level would

A)fall by one half.
B)rise,but only slightly.
C)also double.
D)be unchanged.
E)all of the above.

Question 18

Let M = 36,k = 3,L^s = W/P,MPN = L^-1/2 and Y = 2L^1/2.Calculate the labor demand curve,the aggregate demand curve,and the equilibrium values of the real wage,labor,output,and the price level.

Question 19

Discuss the meaning of the phrase of supply-side economics,discussing how it is similar and different from the traditional classical model.Make sure to discuss the role of the Laffer curve in supply-side theory.

Question 20

According to the classical model,a 10-percent increase in the money supply,holding everything else constant,will lead to

A)a 10% increase in prices,a 10% increase in the real wage,and a 10% increase in interest rates.
B)a 10% increase in prices,a 10% increase in the money wage,and a 10% increase in interest rates.
C)a 10% increase in prices,a 10% increase in the money wage,and no change in interest rates.
D)a 10% increase in prices and no change in the money wage or interest rates.
E)none of the above.

Question 21

If the quantity of investment has fallen but interest rates have risen,then

A)this cannot be explained in the classical model.
B)savings fell.
C)savings rose.
D)investment demand rose.

Question 22

According to the classical model,changes in aggregate demand are driven by

A)changes in taxes.
B)changes in borrowing and lending.
C)changes in fiscal policy.
D)demand curve to the left and increases the price level.

Question 23

If the money supply increases 10-percent,velocity decreases 5-percent,and the price level increases 6-percent,then the change in real GDP is

A)1.
B)4.
C)-1.
D)5.

Question 24

According to the classical model shown above,an autonomous decline in investment shifts the investment schedule to the left.Furthermore,the equilibrium interest rate declines.Distance A describes an interest rate induced

A)decline in saving,which is an equal increase in consumption.
B)increase in investment.
C)decrease in investment.
D)decline in saving,which exceeds the increase in consumption.

Question 25

The Cambridge and Fischer versions of the quantity theory are identical if

A)V = k..
B)V=k².
C)V= 1/k.
D)none of the above.

Question 26

According to the quantity theory,inflation is ultimately controlled by

A)private firms who set prices.
B)the monetary authorities who control the money supply.
C)those who control output.
D)the price of oil.

Question 27

The equation of exchange is a(n)

A)identity relating the volume of transactions at current prices to the stock of money times the turnover rate of each dollar.
B)"truism" and by itself does not explain the variables it contains.
C)identity relating the volume of transactions at base year prices to the stock of money times the turnover rate of each dollar.
D)Both a and b
E)Both b and c

Question 28

The quantity theory assumes that

A)velocity is constant.
B)income is constant.
C)prices are constant.
D)transactions are constant.

Question 29

The difference between savings and investment is that

A)investment is purchasing stock,while savings is putting money in a bank.
B)investment is purchasing capital,savings is postponing consumption.
C)investment is purchasing assets,while consumption is purchasing goods.
D)investment increases output,while savings decreases output.

Figure 4.1

Question 30

According to the classical system,saving is a function of

A)income.
B)the real interest rate.
C)the real wage.
D)the profitability of firms.
E)all of the above.

Question 31

In the classical system,output and employment are primarily dependent on

A)population,productivity,and technology.
B)technology,capital formation,and thrift.
C)population,technology,and capital formation.
D)productivity,thrift,and population.

Question 32

According to the classical model shown in Figure 4.1,an autonomous decline in investment shifts the investment schedule to the left.Furthermore,the equilibrium interest rate declines.Distance B describes an interest rate induced

A)decline in saving,which is an equal increase in consumption.
B)increase in investment.
C)decrease in investment.
D)decline in saving,which exceeds the increase in consumption.

Question 33

If the propensity to hold money is 6 and the money supply is 12,then the classical aggregate demand curve is

A)P = 2Y
B)P/Y = 48
C)P = 1/(2Y)
D)P = 2/Y

Question 34

Which of the following is not a characteristic of the classical system?

A)temporary excess demand and supply in labor markets.
B)Price flexibility
C)Money wage flexibility
D)real values,not nominal values,matter

Question 35

Which of the following statements applies to the classical system?

A)There is money wage inflexibility since full employment already existed
B)A perfectly flexible money wage is not always a requirement for full employment
C)Full employment was easily explained with downward money wage rigidity
D)An imperfect market structure is requirement for full employment
E)none of the above

Question 36

In the classical theory of aggregate demand,a decrease in the velocity of money leads to

A)a downward shift in the aggregate demand curve,a fall in prices,and no change in output.
B)an increase in the aggregate demand curve,a rise in prices,and no change in output.
C)no change in aggregate demand or supply because higher velocity increases the money supply.
D)an upward shift in the aggregate demand curve,a fall in prices,and no change in output.

Question 37

In the classical model,less consumption and more savings would

A)increase aggregate supply and output.
B)reduces aggregate demand and output..
C)decrease real interest rates and output.
D)cause the price level to rise with no effect on output.
E)have no effect on output or the price level.

Question 38

Supply-side economists

A)focus almost exclusively on the supply-side effects of changes in the money supply.
B)did not devote much attention to the supply-side effects of changes in income tax rates since the marginal income tax rate is very low and pertained only to the relatively wealthy.
C)argued that cuts in marginal tax rates had very favorable supply-side effects.
D)argue that government spending is at least as important as tax rates.

Question 39

Classical economists

A)argued that the money supply determined aggregate demand.
B)regarded monetary policy as unimportant since the quantity of money does not determine the price level.
C)believed that the quantity of money influences interest rates and real wages.
D)believed that prices would increase more than proportionate to an increase in the money supply.

Question 40

Which of the following is (are)correct? In the classical system,the suppliers of bonds were the

A)government which always sold bonds to finance a new project.
B)firms which financed all investment expenditures by selling bonds.
C)government which might sell bonds to finance spending in excess of tax revenues.
C)
D)Both b and

Question 41

In the classical model the interest rate is determined by

A)real investment demand.
B)real saving.
C)government spending.
D)tax revenues.
E)all of the above.

Question 42

In the classical model,people hold money because

A)it is a way to save.
B)it makes trade easier.
C)it is the way to measure the value of goods and services.
D)it is an asset.

Question 43

The increased willingness of women to enter the workforce has most likely lead to

A)an increase in labor demand,higher real wages,and a lower price level.
B)an increase in labor supply,higher real wages,and a lower price level.
C)an increase in labor supply,higher real wages,and a higher price level.
D)a decrease in labor demand,lower real wages,and no effect on the price level.
E)none of the above.

Question 44

According to the classical model,money influences

A)only prices.
B)nominal and real variables in both the long and short-run.
C)both nominal and real variables but only in the short-run.
D)only nominal variables.

Question 45

In the classical theory of aggregate demand,a decrease in the propensity to hold money will

A)shift the aggregate demand curve up.
B)Shift the aggregate demand and supply curves up and to the right.
C)have no effect on aggregate demand as the money supply changes.
D)will increase the money supply

Question 46

In the classical model,an increase in government spending shifts the

A)demand for loanable funds to the right.
B)demand for loanable funds to the left.
C)supply of loanable funds to the right.
D)supply of loanable funds to the left.

Question 47

Assuming that,over a given period,the value of transactions in current dollars is $8 trillion and the money stock is $500 billion.What is the transaction velocity of money?

A) .0625
B) 12
C)16
D)None of the above

Question 48

In the classical model,a tax on labor supply will

A)decrease the demand for labor,increase the real wage,decrease output,and reduce the price level.
B)decrease the supply of labor,increase real wages,decrease output,and increase the price level.
C)decrease the demand for labor,the real wage,decrease output,and increase the price level.
D)have no effect on the labor market,but reduce output and increase the price level.
E)increase both labor demand and supply,which will increase output and the price level.

Question 49

In the classical model,a 20 percent increase in the money growth rate leads to:

A)a 20 percent inflation rate.
B)a 23 percent increase in the inflation rate.
C)no change in the inflation rate.
D)a 20 percent increase in the inflation rate.

Question 50

Hyperinflation is a period of time when

A)people "hoard" their money.
B)the price level explodes and the money supply decreases.
C)both the price level and taxes explode.
D)inflation is greater than 1,000%.
E)the price level rises faster than the money supply.

Question 51

If there is an increase in government spending that is financed by issuing bonds,then

A)interest rates should rise which increases private investment.
B)interest rates will remain the same unless taxes are reduced as well.
C)interest rates should fall which increases private investment.
D)interest rates should rise which decreases private investment.
E)None of the above.

Question 52

According to classical economists,

A)money was a "veil" that determined the nominal values in which such variables as the level of economic activity were measured.
B)money can have a temporary impact on output.
C)it is the nominal interest rates that matters in decisions to save and invest.
D)Both a and b
E)Both a and c

Question 53

In the classical model,if money growth and velocity are constant,then:

A)the price level will rise at the rate of output growth.
B)the price level will be constant.
C)the price level will fall at the rate of output growth.
D)none of the above.

Question 54

According to the Cambridge approach to the quantity theory,people hold money:

A)to store their wealth.
B)to make transactions.
C)as a substitute for consumption.
D)only when they have to.

Question 55

Which of the following statements is correct?

A)It is monetary policy and not tax policy that influences interest rates.
B)Tax reductions play little role in influencing output.
C)Marginal tax rates today are lower than they have ever been in U.S.history.
D)Budget deficits show little correlation with interest rates.
E)None of the above.

Question 56

The equilibrium real wage is 25,the money supply equals 15,and k equals 3.If equilibrium output is 10 then the equilibrium nominal wage is

A)3.
B)4.5.
C).22
D)5

Question 57

Suppose that there is an increase in technology.The classical model predicts that

A)both output and the price level rises.
B)output rises and the price level remains the same.
C)output rises and the price level falls.
D)none of the above.

Question 58

Which of the following statements is (are)correct? The equilibrium interest rate is the rate that

A)equates the supply of loanable funds with the demand for loanable funds
B)equates new saving with investment plus the bond-financed government surplus
C)equates private savings with investment
D)All of the above
E)None of the above

Question 59

In the classical system,the quantity of money

A)determines the price level and,for a given real income,the level of nominal income.
B)does not affect the equilibrium values of output,employment,and the interest rate.
C)affects the equilibrium values of output,employment,and the interest rate.
D)Both a and b
E)Both a and c

Question 60

Hyperinflations are caused by

A)persistant falls in aggregate supply.
B)increases in poverty levels.
C)high levels of money growth over sustained periods of time.
D)falls in the velocity of money.