Deck 14: Money and the Economy

Question 1

If M = $500,P = $20,and Q = 100,then V is

A) 2.5.
B) 4.0.
C) 5.0
D) 6.0
E) 7.5

Answer 1

B

Question 2

In the equation of exchange,the average number of times a dollar is used to purchase a final good or service is the __________ of money.

A) turnover
B) elasticity
C) velocity
D) transfer

Answer 2

C

Question 3

In the equation of exchange,"PQ" stands for

A) GDP.
B) Real GDP.
C) nominal investment.
D) real investment.

Answer 3

A

Question 4

The simple quantity theory of money predicts that if

A) the money supply rises by $200, then GDP falls by $200.
B) GDP rises by $400, then the money supply rises by $400.
C) the money supply rises by 10 percent, then the price level rises by 10 percent.
D) the money supply falls by $300, then GDP rises by $300.

Question 5

In the equation of exchange,GDP divided by the money supply is equal to

A) M.
B) V.
C) P.
D) Q.

Question 6

In the equation of exchange,the money supply multiplied by velocity equals

A) GDP.
B) the price level.
C) the quantity of goods produced.
D) the average number of times that a dollar is used to purchase a final good or service.

Question 7

The simple quantity theory of money assumes that

A) velocity and Real GDP are constant.
B) only velocity is constant.
C) only the money supply is constant.
D) only the price level is constant.

Question 8

The equation of exchange is

A) an identity.
B) a theory.
C) an abstraction
D) a hypothesis.
E) a, b, and c

Question 9

The velocity of money is the __________ number of times a dollar is spent to buy final goods and services in a year.

A) total
B) average
C) marginal
D) statistical

Question 10

Which of the following is consistent with the equation of exchange?

A) Total spending must equal the total sales revenues of business firms.
B) The money supply multiplied by velocity must equal GDP.
C) The money supply multiplied by velocity must equal the price level times Real GDP.
D) a and b
E) a, b and c

Question 11

In the equation of exchange,"Q" stands for

A) the interest rate.
B) quality.
C) GDP.
D) Real GDP.

Question 12

The simple quantity theory of money predicts that changes in

A) the money supply lead to strictly proportional changes in the price level.
B) the money supply do not affect the price level.
C) the price level lead to strictly proportional changes in velocity and GDP.
D) velocity lead to nearly proportional changes in the money supply.

Question 13

In symbols,the equation of exchange says

A) MP = QV.
B) MQ = PV.
C) MV = PQ.
D) MP = MQ.

Question 14

The equation of exchange

A) is a theory of the macroeconomy as it stands.
B) can be turned into a theory of the macroeconomy if certain assumptions are made about some of its variables.
C) cannot be turned into a theory of the macroeconomy.
D) is a theory in microeconomics as it stands.

Question 15

Which of the following statements is true?

A) Monetarists believe that the government should be very involved in managing and directing the economy.
B) Monetarists believe that the economy is self-regulating.
C) There is very little difference between monetarist and Keynesian thought.
D) Monetarists hold that velocity is constant.
E) a and c

Question 16

In the equation of exchange,the letter "V" stands for

A) variance.
B) validity.
C) volume.
D) velocity.

Question 17

If V is constant,the rate of growth of M that is consistent with a stable price level is

A) zero.
B) the rate of growth of PQ.
C) the rate of growth of Q.
D) the expected rate of inflation.
E) none of the above

Question 18

Which of the following statements is true?

A) Velocity equals the money supply.
B) GDP is larger than the money supply if velocity is greater than 1.
C) The money supply must be equal to GDP.
D) GDP is always twice the money supply.

Question 19

Velocity equals GDP __________ the money supply.

A) plus
B) multiplied by
C) divided by
D) minus

Question 20

Monetarists can be described as a group of macroeconomists who

A) emphasize the importance of the federal government's involvement in the economy to dampen the harmful effects of the business cycle.
B) emphasize the importance of the money supply as a determinant of macroeconomic activity.
C) tend to view government spending and taxation policy as the chief means of stabilizing the economy.
D) feel that money should not be created in the private banking system, but only by government.

Question 21

MV in the equation of exchange is also defined as

A) national income.
B) total expenditures.
C) personal income.
D) Real GDP.

Question 22

Some economists argue that increases in government spending are not a likely source of continued inflation because

A) increases in government spending cause reductions in other spending components.
B) government spending is not created by the Fed.
C) increases in government spending can be financed by money creation.
D) a and b
E) a and c

Question 23

According to the equation of exchange,if Real GDP is $3 trillion and the money supply is $0.5 trillion,then velocity

A) must be 6.
B) must be 1/6.
C) must be 4 trillion.
D) must be 1/4 trillion.
E) cannot be determined without knowing what the price level is.

Question 24

When Milton Friedman said that "inflation is always and everywhere a monetary phenomenon," he was referring to

A) one-shot inflation.
B) continued inflation.
C) a and b
D) neither a nor b

Question 25

Between 1890 and 1914,the gold stock of the world _______________ and world prices (in general)

A) doubled; increased.
B) tripled; increased.
C) rose by 50%; increased.
D) doubled; decreased.
E) tripled; decreased.

Question 26

Suppose the economy starts off producing Natural Real GDP.Next,aggregate supply rises,ceteris paribus.As a result,the price level falls in the short run.In the long run,when the economy has moved back to producing Natural Real GDP,the price level will be

A) higher than it was in short-run equilibrium.
B) lower than it was in short-run equilibrium but higher than it was originally (before aggregate supply rose).
C) lower than it was originally (before aggregate supply rose).
D) equal to what it was originally (before aggregate supply rose).

Question 27

Suppose the economy starts off producing Natural Real GDP.Next,aggregate demand rises,ceteris paribus.As a result,the price level rises in the short run.In the long run,when the economy has moved back to producing Natural Real GDP,the price level will be

A) higher than it was in short-run equilibrium.
B) lower than it was in short-run equilibrium but higher than it was originally (before aggregate demand increased).
C) lower than it was originally (before aggregate demand increased).
D) equal to what it was originally (before aggregate demand increased).

Question 28

The simple quantity theory of money can be written as

A) P = MV/Q.
B) MV = Q/P.
C) PM = VQ.
D) Q = PMV.
E) all of the above

Question 29

The California gold rush resulted in

A) an increase in the amount of money in circulation and higher prices throughout the country.
B) no change in the amount of money in circulation and higher prices throughout the country.
C) an increase in the amount of money in circulation and higher prices only in California.
D) no change in the amount of money in circulation and higher prices only in California.

Question 30

If Real GDP is $8,000,the money supply is $4,000,and the price level is 3,then velocity is

A) 2.00.
B) 3.33.
C) 6.00.
D) 7.50.
E) none of the above

Question 31

"The money supply multiplied by velocity must equal GDP" is a statement of the

A) simple quantity theory of money.
B) equation of exchange.
C) modern quantity theory of money.
D) all of the above

Question 32

Can a one-time increase in the supply of money cause one-shot inflation?

A) Yes, because it shifts the aggregate demand curve rightward.
B) No, because it cannot shift the aggregate demand curve rightward.
C) Yes, because it shifts the aggregate demand curve leftward.
D) Yes, because it shifts the aggregate supply curve rightward.

Question 33

The chief difference between one-shot inflation and continued inflation is that

A) Keynesians believe all inflations are one-shot inflations and monetarists believe all inflations are continued inflations.
B) one-shot inflation is long and continued inflation is short.
C) one-shot inflation is a single increase in the price level and continued inflation is a sustained increase in the price level.
D) monetarists believe all inflations are one-shot inflations and Keynesians believe all inflations are continued inflations.

Question 34

If Real GDP is $8,000,the money supply is $3,100,and velocity is 4,then the price level is

A) 1.92.
B) 4.69.
C) 1.55.
D) 3.33.

Question 35

If the money supply is $400,velocity is 6,then in the equation of exchange,PQ is

A) $67.
B) $1,500.
C) $2,400.
D) $406.

Question 36

Which of the following statements is true?

A) Nominal interest rate = real interest rate - expected inflation rate.
B) Nominal interest rate = real interest rate + expected inflation rate.
C) Real interest rate = nominal interest rate + expected inflation rate.
D) Expected inflation rate = nominal interest rate + real interest rate.
E) Expected inflation rate = real interest rate - nominal interest rate.

Question 37

According to the equation of exchange,if GDP equals $4 trillion and the money supply equals $1 trillion,the velocity of money

A) must be 0.25.
B) must be 4.
C) must be 0.25 trillion.
D) must be 4 trillion.
E) cannot be determined without knowing what the price level is.

Question 38

The simple quantity theory of money predicts that an increase in M of 5 percent will lead to

A) an increase in P of 5 percent.
B) an increase in P of less than 5 percent.
C) an increase in P of more than 5 percent.
D) a decrease in P of 5 percent.
E) a decrease in P of more than 5 percent.

Question 39

If GDP is $16,000 and velocity is 4,the money supply is

A) $27,000.
B) $12,000.
C) $4,000.
D) $3,000.
E) There is not enough information provided to answer this question.

Question 40

One-shot inflation can originate

A) only on the demand side of the economy.
B) only on the supply side of the economy.
C) on the demand side or the supply side of the economy.
D) on neither the demand side nor the supply side of the economy.

Question 41

An increase in the money supply that leads to an increase in expected inflation,which in turn leads to an increase in the interest rate,is best described as the

A) liquidity effect.
B) income effect.
C) expectations effect.
D) adaptive expectations theory.

Question 42

Real-world continued inflation is probably a result of continued

A) increases in aggregate demand.
B) decreases in aggregate demand.
C) increases in aggregate supply.
D) decreases in aggregate supply.

Question 43

The income effect is the

A) increase in the interest rate caused by an increase in Real GDP.
B) increase in the interest rate due to a higher expected inflation rate.
C) decrease in the interest rate due to an increase in the supply of loanable funds.
D) change in national income brought about by a change in interest rates.
E) rate of change in national income brought about by a change in the supply of money.

Question 44

The liquidity effect is the

A) decrease in the interest rate due to an increase in the supply of loanable funds.
B) increase in the interest rate due to an increase in national income.
C) increase in the interest rate due to a higher expected inflation rate.
D) increase in the interest rate due to an increase in the price level.

Question 45

The liquidity effect is the

A) increase in the interest rate brought on by an increase in GDP.
B) increase in the interest rate due to a higher expected inflation rate.
C) decrease in the interest rate due to an increase in the supply of loanable funds.
D) response, in terms of rate of flow, of the money supply to a change in government spending.
E) rate of change in the price level caused by a change in the supply of money.

Question 46

Exhibit 14-1

Refer to Exhibit 14-1.Starting from point A,a one shot,supply-side-induced inflation raises the price level in the economy to P?.Assuming no other changes,in the long run the economy is likely to settle at point

A) A.
B) B.
C) C.
D) D.
E) E.

Question 47

A decrease in the interest rate due to an increase in the supply of loanable funds is referred to as the __________ effect.

A) expectations
B) liquidity
C) income
D) a and c
E) a, b and c

Question 48

Grade inflation at colleges and universities is _________ to general price inflation in that ______________.

A) similar; both can be deceptive.
B) not comparable; it is impossible for grades to be inflated.
C) similar; grades tend to go up when prices are rising.
D) not comparable; grades tend to fall while prices tend to rise.

Question 49

Which of the following factors can change continually in such a way as to bring about continued increases in aggregate demand?

A) autonomous consumption
B) autonomous investment
C) government spending
D) the money supply
E) all of the above

Question 50

The change in the interest rate due to a change in the supply of loanable funds is referred to as the __________ effect.

A) income
B) expectations
C) liquidity
D) real

Question 51

Monetarists believe

A) Real GDP is not determined by M in the long run.
B) velocity is constant.
C) the SRAS curve is vertical.
D) a and c
E) a, b and c

Question 52

Continued inflation occurs

A) if there is a sustained increase in the price level.
B) only if there is a sustained increase in the price of every good and service.
C) only if there is a sustained increase in the price of every good and service by the same dollar amount.
D) only if there is a sustained increase in the price of every good and service by the same percentage.

Question 53

Monetarists believe that

A) velocity changes in a predictable way.
B) aggregate supply depends on the money supply and velocity.
C) the SRAS curve is upward sloping.
D) a and c
E) a, b and c

Question 54

Suppose the Fed buys government securities from the public.The liquidity effect of this is that the interest rate will

A) increase.
B) decrease.
C) remain constant.
D) any of the above are possible

Question 55

The expectations effect is the

A) increase in the interest rate brought on by an expected increase in Real GDP.
B) increase in the interest rate due to a higher expected inflation rate.
C) decrease in the interest rate due to an expected increase in the supply of loanable funds.
D) idea that people form their expectations of inflation by considering all available information about past, present, and future inflation.
E) idea that people form their expectations of inflation by considering only information about past inflation experience.

Question 56

According to monetarists,changes in velocity can

A) lower GDP
B) raise GDP
C) shift the SRAS, but not the LRAS
D) a and b
E) a, b and c

Question 57

Exhibit 14-1

Refer to Exhibit 14-1.A continued increase in the money supply by the Fed is likely to take the economy along which of the following paths?

A) A-E-B-H-C
B) A-D-B-I-C
C) A-D-F-H-C
D) A-D-B-H-C
E) A-E-B-I-C

Question 58

The change in the interest rate brought on by a change in Real GDP is referred to as the __________ effect.

A) liquidity
B) expectations
C) income
D) nominal

Question 59

A monetarist would argue that

A) small changes in M could be offset by changes in V and not cause changes in P.
B) changes in M in the short run can cause Real GDP to fall.
C) prices and wages are flexible.
D) b and c
E) a, b and c

Question 60

Ceteris paribus,the greater the increase in the money supply,the __________ the inflation rate,the __________ the expected inflation rate,and the __________ the interest rate.

A) higher; higher; higher
B) lower; lower; lower
C) higher; lower; higher
D) lower; higher; lower
E) higher; lower; lower

Question 61

According to the simple quantity theory of money in the AD-AS framework,the AD curve is

A) vertical.
B) downward sloping.
C) horizontal.
D) upward sloping.

Question 62

In the monetarist version of the AD-AS framework,starting from long-run equilibrium,a decrease in velocity produces

A) no change in Real GDP in the short run or the long run.
B) a rise in Real GDP in both the short run and the long run.
C) a fall in Real GDP in both the short run and the long run.
D) a fall in Real GDP in the short run, but not in the long run.
E) no change in Real GDP in the short run, but a rise in the long run.

Question 63

In the monetarist version of the AD-AS framework,a decrease in velocity produces a __________ shift of the __________ curve.

A) rightward; AD
B) rightward; SRAS
C) leftward; AD
D) leftward; SRAS

Question 64

According to the simple quantity theory of money in the AD-AS framework,when the money supply decreases,the result is __________ in Real GDP and __________ in the price level.

A) no change; no change
B) a rise; no change
C) no change; a rise
D) a rise; a fall
E) no change; a fall

Question 65

According to the simple quantity theory of money in the AD-AS framework,when the money supply increases,the result is __________ in Real GDP and __________ in the price level.

A) no change; no change
B) a rise; no change
C) no change; a rise
D) a rise; a fall
E) a fall; a rise

Question 66

Exhibit 14-1

Refer to Exhibit 14-1.A continued increase in the price of oil,combined with Fed attempts to respond to these oil shocks by increasing aggregate demand,is likely to take the economy along which of the following paths?

A) A-E-B-H-C
B) A-E-G-I-C
C) A-D-B-E-A
D) A-D-B-H-C
E) A-E-B-I-C

Question 67

In the monetarist version of the AD-AS framework,an increase in the money supply produces a __________ shift of the __________ curve.

A) rightward; AD
B) rightward; SRAS
C) leftward; AD
D) leftward; SRAS

Question 68

If the Fed increases its open market purchases of government securities,it exerts a downward pressure on the interest rate.Such a phenomenon is usually referred to as the ___________________ effect.

A) income
B) substitution
C) open market
D) liquidity
E) expectations

Question 69

The assumption made about Real GDP in the simple quantity theory of money produces a ____________________ curve in the AD-AS version of the theory.

A) horizontal AD
B) vertical AD
C) horizontal AS
D) vertical AS

Question 70

Suppose we are at a long-run equilibrium point in an AD-AS model.Then the money supply increases.In the short run,is there any difference between what happens in the simple quantity theory of money (SQTM)version and the monetarist version of the model?

A) There is no difference.
B) In the SQTM version, the price level rises; in the monetarist version, it does not.
C) In the monetarist version, the price level falls; in the SQTM version, it does not.
D) In the monetarist version, the Real GDP rises; in the SQTM version, it does not.
E) In the SQTM version, Real GDP falls; in the monetarist version, it does not.

Question 71

The aggregate supply curve in the short run is vertical in __________ version of the AD-AS framework.

A) the simple quantity theory of money
B) the monetarist
C) both the simple quantity theory of money and the monetarist
D) neither the simple quantity theory of money nor the monetarist

Question 72

Exhibit 14-1

Refer to Exhibit 14-1.What sequence of points shows the short- and long-run consequences of a rise in velocity under monetarist assumptions?

A) A-E-B
B) B-D-A
C) A-D-B
D) B-A

Question 73

Suppose we are at a long-run equilibrium point in an AD-AS model.Then the money supply falls.In the short run,is there any difference between what happens in the simple quantity theory of money (SQTM)version and the monetarist version of the model?

A) There is no difference.
B) In the SQTM version, the price level falls; in the monetarist version, it does not.
C) In the monetarist version, Real GDP falls; in the SQTM version, it does not.
D) In the monetarist version, the price level falls; in the SQTM version, it does not.
E) In the SQTM version, Real GDP falls; in the monetarist version, it does not.

Question 74

Which of the following variables is capable of continually increasing aggregate demand with no offsetting influence on any of the components of total spending?

A) the inflation rate
B) the interest rate
C) government spending
D) the money supply
E) the wage rate

Question 75

In the monetarist version of the AD-AS framework,starting from long-run equilibrium,an increase in the money supply produces

A) no change in Real GDP in the short run or the long run.
B) a rise in Real GDP in both the short run and the long run.
C) a rise in Real GDP in the short run, but not in the long run.
D) a rise in Real GDP in the long run, but not in the short run.

Question 76

Exhibit 14-1

Refer to Exhibit 14-1.What sequence of points shows the short- and long-run consequences of a rise in the money supply under monetarist assumptions?

A) A-E-B
B) B-D-A
C) A-D-B
D) B-A

Question 77

Exhibit 14-1

Refer to Exhibit 14-1.What sequence of points shows the short- and long-run consequences of a fall in the money supply under monetarist assumptions?

A) A-E-B
B) B-D-A
C) A-D-B
D) B-A

Question 78

Exhibit 14-1

Refer to Exhibit 14-1.Starting from point A,a one-shot,demand-side-induced inflation raises the price level in the economy to P?.Assuming no other changes,in the long run the economy is likely to settle at point

A) A.
B) B.
C) C.
D) D.
E) E.

Question 79

Exhibit 14-1

Refer to Exhibit 14-1.What sequence of points shows the short- and long-run consequences of a fall in velocity under monetarist assumptions?

A) A-E-B
B) B-D-A
C) A-D-B
D) B-A

Question 80

According to the simple quantity theory of money in the AD-AS framework,when the money supply decreases,the __________ curve shifts to the __________.

A) AD; left
B) AD; right
C) AS; left
D) AS; right