Deck 22: The Classical Foundations

Question 1

In the Classical view, falling interest rates increase

A) government spending.
B) saving.
C) velocity.
D) investment.

Answer 1

B

Question 2

According to Classical interest rate theory, falling interest rates will

A) increase the demand for money.
B) decrease the demand for money.
C) decrease investment expenditures.
D) decrease the saving rate.

Answer 2

D

Question 3

According to Classical interest rate theory, rising interest rates will

A) increase the demand for money.
B) decrease the demand for money.
C) increase investment expenditures.
D) increase the saving rate.

Answer 3

D

Question 4

In the Classical model, a decrease in saving will result in saving being __________ than investment which will cause the interest rate to __________.

A) greater; rise
B) greater; fall
C) less; rise
D) less; fall

Question 5

Which of the following statements is inconsistent with Say's Law?

A) The economy has flexible wages and prices.
B) The economy will produces at the full employment level of output.
C) The economy has an environment of "laissez faire."
D) The economy's level of saving depends solely on the level of income.

Question 6

The function of the interest rate in the Classical model was to keep the economy at full employment equilibrium by assuring that

A) actual saving equaled actual investment.
B) actual saving equaled desired investment.
C) desired saving equaled desired investment.
D) desired saving equaled actual investment.

Question 7

Under the Cambridge cash balance approach, money demand is determined by

A) nominal income.
B) real income.
C) the saving rate.
D) velocity.

Question 8

In the Classical interest theory, saving and investment determine

A) the price level.
B) unemployment.
C) the money supply.
D) interest rates.

Question 9

Money neutrality implies that changes in the money supply have an impact on

A) the unemployment rate.
B) interest rates.
C) the price level.
D) real GDP.

Question 10

In the Classical system, the interest rate is determined by all of the following except

A) the thriftiness of the public.
B) the money supply.
C) the productivity of capital.
D) investment.

Question 11

According to Classical interest rate theory, which of the following will increase the equilibrium interest rate?

A) A decrease in investment
B) A decrease in saving
C) An increase in money demand
D) A decrease in money demand

Question 12

In the Classical view, rising interest rates reduce

A) government spending.
B) saving.
C) velocity.
D) investment.

Question 13

According to Say's law

A) the economy will suffer from underemployment when total spending is insufficient to justify production at full employment.
B) the economy will never suffer from unemployment or underconsumption.
C) money is neutral with respect to the real sector of the economy.
D) the production function defines the total demand for goods and services.

Question 14

Say's law

A) explains the role of money.
B) deals with interest rates, employment, and production.
C) was accepted and praised by John Maynard Keynes.
D) None of the above.

Question 15

Which of the following is not a factor in the equation of exchange?

A) Money velocity
B) Money supply
C) The price level
D) Nominal income

Question 16

In the Classical model, an increase in saving will result in saving being __________ than investment which will cause the interest rate to __________.

A) greater; rise
B) greater; fall
C) less; rise
D) less; fall

Question 17

The two cornerstones of Classical economics are the Quantity Theory and

A) Liquidity Preference Theory.
B) disequilibrium analysis.
C) Say's Law.
D) the Phillips Curve.

Question 18

In the Classical view, the money supply determines

A) interest rates.
B) the saving rate.
C) aggregate supply.
D) the price level.

Question 19

In the Classical system, the total output of goods and services and total employment are determined by all of the following except

A) the interest rate.
B) the labor force.
C) the supply of capital.
D) existing technology.

Question 20

According to Classical interest rate theory, which of the following will increase the equilibrium interest rate?

A) An increase in investment
B) An increase in saving
C) An increase in real output
D) A decrease in real output

Question 21

If the total output is 300, the velocity of money is 5, and the money supply is 600, then the price level is

A) 10.0.
B) 2.0.
C) 2.50.
D) 5.0.

Question 22

Which of the following is assumed constant in the short-run Classical model?

A) Money supply
B) Output
C) Aggregate demand
D) Wages

Question 23

Assume that consumption spending is equal to $600, government spending is $100 billion, and GDP is $800 billion. If net exports are equal to zero, investment spending must be

A) $700 billion.
B) $600 billion.
C) $500 billion.
D) $100 billion.

Question 24

In the Classical view, inflation is the result of

A) excessive monetary growth.
B) speculation.
C) government spending.
D) natural disasters.

Question 25

If GDP = $300 billion and velocity = 1.5, then the money supply is

A) indeterminate.
B) $200 billion.
C) $300 billion.
D) $450 billion.

Question 26

According to Classical economists, investment is __________ related to the __________.

A) directly; interest rate
B) directly; level of GDP
C) inversely; interest rate
D) inversely; level of GDP

Question 27

Using the cash balance approach with k = 1/2 and GDP equal to $600 billion, cash balances must be equal to

A) $1200 billion.
B) $600 billion.
C) $300 billion.
D) More information is needed to answer this question.

Question 28

The Cambridge k is all of the following except

A) the reciprocal of the income velocity of money.
B) a transactions demand for money.
C) the fraction of GDP that people wish to hold in the form of money balances.
D) the velocity of money.

Question 29

Using the cash balance version of the quantity theory with k = .2, an increase in the money supply of $100 billion leads to an increase in GDP of

A) $500 billion.
B) $100 billion.
C) $50 billion.
D) $20 billion.

Question 30

The velocity of money is assumed to be constant in the Classical model because

A) the payment habits of the community.
B) fixed level of real GDP.
C) the demand for money varies with the level of real output.
D) aggregate demand is constant.

Question 31

In an economy with no government or foreign sector, which of the following always holds true, ex-post?

A) Consumption equals investment.
B) Velocity equals money demand.
C) Saving equals consumption.
D) Saving equals investment.

Question 32

In the Classical model, the price level is determined by

A) aggregate supply.
B) the level of output.
C) the Cambridge k.
D) aggregate demand.

Question 33

In the Cambridge version of the Quantity Theory of Money, the amount of real money balances __________ after an increase in the nominal money supply.

A) increases
B) decreases
C) is unchanged
D) Cannot be determined from the information given.

Question 34

If velocity and output are fixed at 5 and 400, respectively, and the price level is 2, then the money supply is

A) 4,000.
B) 200.
C) 160.
D) 40.

Question 35

Using the Cambridge equation, by how much does the demand for money rise at a constant real GDP of $2,000 billion when the price level rises by 10 percent from 1.00, given k = 0.25?

A) $200 billion
B) $20 billion
C) $550 billion
D) $50 billion

Question 36

In the Cambridge approach, if k is .5, total output is $50 billion, and the money supply is $100 billion, the price level is

A) 0.5.
B) 4.0.
C) 3.0.
D) 10.0.

Question 37

The price level is 3, total output is 500, and the money supply is 200. The velocity of money is

A) 7.5.
B) 2.5.
C) 2.0.
D) None of the above.

Question 38

If the equation of exchange holds, and if the velocity of money and total output are fixed, then, if the money supply doubles,

A) the price level will increase by half.
B) the price level will decrease by half.
C) the price level will double.
D) the price level will decrease by 25 percent.

Question 39

What economist in the early 20th century refined the use of the equation of exchange?

A) Jean-Baptiste Say
B) Irving Fisher
C) Thomas Malthus
D) Adam Smith

Question 40

In the Classical model, the aggregate supply curve determines the

A) price level.
B) inflation rate.
C) level of output.
D) money supply.

Question 41

Assuming a nominal interest rate of 6 percent, an unemployment rate of 4 percent, and an inflation rate of 2 percent, the real interest rate is approximately

A) 2 percent.
B) 4 percent.
C) 6 percent.
D) 8 percent.

Question 42

Classical economists and modern monetarists agree that the best way to examine the economy is through the use of

A) aggregate supply and demand.
B) the multiplier.
C) the quantity theory.
D) the GNP account.

Question 43

An increase in aggregate demand in the Classical model causes the price level to

A) rise but output remains constant.
B) fall but output remains constant.
C) rise but output to fall.
D) fall but output to rise.

Question 44

The origins of modern monetarism lie in the work of the

A) Classical economists.
B) Keynesians.
C) Malthusians.
D) Mercantilists.

Question 45

Modern monetarists view any increases or decreases in total output stemming from expansions or contractions in the money supply as

A) permanent.
B) temporary.
C) irrelevant.
D) extremely important.

Question 46

If the fraction of the economy's nominal GDP held by the public in the form of money is 20 percent, income velocity in the economy is

A) 5.
B) 80 percent.
C) 0.20.
D) 20.

Question 47

Modern Monetarists argue that the velocity of money is

A) constant.
B) the inverse of the money multiplier.
C) unmeasurable.
D) predictable.

Question 48

In the Classical model, what is certain to shift the aggregate demand curve?

A) A rise in the price level
B) A rise in real GDP
C) A rise in the money supply
D) A rise in government expenditure

Question 49

In the Classical model, a decrease in the money supply __________ the real GDP and __________ the price level.

A) leaves unchanged; leaves unchanged
B) leaves unchanged; lowers
C) lowers; lowers
D) lowers; leaves unchanged

Question 50

The Great Depression is thought to have been prolonged and made deeper by

A) contraction of the money supply.
B) the stock market crash.
C) speculative behavior of investors.
D) rapid inflation.

Question 51

In the Classical model, aggregate demand determines the

A) level of real output.
B) the level of employment.
C) the price level.
D) the velocity of money.

Question 52

A decrease in the money supply shifts the aggregate __________ curve to the __________.

A) demand; left
B) demand; right
C) supply; left
D) supply; right

Question 53

In the view of the Classical economists, a increase in aggregate demand leads to

A) lower output levels.
B) a higher price level.
C) higher output levels.
D) a lower price level.

Question 54

In the Classical model, an increase in aggregate demand leads to __________ real GDP and __________ price level.

A) an unchanged; an unchanged
B) a rising; an unchanged
C) a rising; a rising
D) an unchanged; a rising

Question 55

If the inflation rate is 5 percent and the real rate of interest is 3 percent, the nominal interest rate is

A) 8 percent.
B) 5 percent.
C) 3 percent.
D) 2 percent.

Question 56

Which of the following ensures full employment in the Classical model?

A) Wage and price flexibility
B) The equation of exchange
C) Inventory adjustment
D) Constant velocity

Question 57

Roughly speaking, the nominal interest rate is __________ than the real interest rate by the amount of the expected __________.

A) higher; growth rate of real GDP
B) higher; inflation rate
C) lower; growth rate of real GDP
D) lower; inflation rate

Question 58

A decrease in aggregate demand in the Classical model leads to

A) lower prices and lower output.
B) lower prices and higher output.
C) lower prices and unchanged output.
D) unchanged prices and output.

Question 59

In the view of the Classical economists, rising aggregate demand leads to

A) lower unemployment.
B) inflation.
C) higher unemployment.
D) deflation.

Question 60

According to Classical interest rate theory, which of the following will decrease the equilibrium real interest rate?

A) A decrease in investment
B) A decrease in saving
C) An increase in money demand
D) A decrease in money demand

Question 61

What is Y - C equal to?

A) S
B) S + T
C) I + G
D) T

Question 62

If I = S, then

A) C + I = S + I.
B) C + S = S + I.
C) C + S = C + I.
D) C - S = S - I.

Question 63

In an economy without government or a foreign sector the equilibrium level of output occurs when

A) actual saving equals actual investment.
B) actual saving equals desired investment.
C) desired saving equals desired investment.
D) desired saving equals actual investment.

Question 64

Under the assumption of rational expectations, an anticipated increase in the money supply has no effect on

A) nominal GDP.
B) real GDP.
C) the price level.
D) velocity.

Question 65

If C + I = Y and Y - C = S, then

A) I = 0.
B) S = 0.
C) S = I.
D) Y = S + I.

Question 66

According to rational expectations theory,

A) increasing the money supply to reduce unemployment will always be successful.
B) decreasing the money supply to reduce unemployment will usually be successful.
C) increasing the money supply to reduce unemployment will not be successful because of an offsetting decrease in prices.
D) increasing the money supply to reduce unemployment will not be successful because of an offsetting increase in prices.

Question 67

The theory of "rational expectations" is most closely associated with __________ economists.

A) Classical
B) Keynesian
C) Monetarist
D) New Classical

Question 68

Rational expectations theory is based on the assumption that when individuals in the economy are forming expectations, they

A) use all available information.
B) use past evidence only.
C) consistently make the same errors.
D) pay no attention to past information.

Question 69

Monetarists have maintained the Classical tradition by emphasizing the

A) importance of government's fine-tuning policies.
B) inflationary impact of government spending.
C) instability of money demand.
D) inherent stability of the economy.

Question 70

In an economy without government or a foreign sector it is always true that

A) actual saving equals actual investment.
B) actual saving equals desired investment.
C) desired saving equals desired investment.
D) desired saving equals actual investment.

Question 71

What is Y - S equal to?

A) I
B) C - T
C) I + G
D) C

Question 72

Monetarists differ from Classical economists in that they argue that

A) changes in the money supply affect only the price level in the long run.
B) velocity is not fixed but is predictable.
C) the economy tends to be stable around full employment.
D) the demand for money is a fixed fraction of nominal GDP.

Question 73

Monetarists view government intervention in the economy as

A) necessary to maintain full employment.
B) unnecessary and potentially damaging.
C) effective because it stimulates capital formation.
D) leads to consistently higher employment and output.