Deck 31: The Debate Over Monetary and Fiscal Policy

Question 1

Data indicate that the velocity of M1 is greater than the velocity of M2.

Answer 1

True

Question 2

The equation of exchange states that the money value of GDP transactions must be equal to the product of the average stock of money and velocity.

Answer 2

True

Question 3

The equation of exchange is M × V = P × Y .

Answer 3

True

Question 4

Velocity is not a constant, and it normally increases when interest rates rise.

Question 5

The velocity of money is equal to nominal GDP divided by money stock.

Question 6

The equation of exchange is an accounting identity, not an economic theory.

Question 7

If velocity remains relatively constant, changes in the money supply can have a predictable effect on nominal GDP.

Question 8

The quantity theory of money assumes that velocity is approximately constant resulting in nominal GDP to be proportional to the money stock.

Question 9

If the velocity of circulation is 10 and the money supply is $250, the value of transactions will be $25.

Question 10

If velocity is a constant, then the equation of exchange is an economic model.

Question 11

The monetarist and the Keynesian approaches are two competing theories of aggregate demand.

Question 12

Historically, the most harmful bubbles are those financed by heavy borrowing and extensive use of leverage.

Question 13

Expansionary monetary policy increases bank reserves and the money supply, also decreases interest rates.

Question 14

As market interest rates rise, people want to hold smaller cash balances, which means that the existing stock of money circulates faster and velocity rises.

Question 15

The quantity theory of money is a theory asserting that the quantity of money available determines the price level and the growth rate in the quantity of money determines the inflation rate.

Question 16

Velocity is the rate at which money changes hands.

Question 17

Expansionary monetary policy will decrease interest rates and decrease the velocity of money.

Question 18

Over long periods of time, M2 velocity has been relatively constant.

Question 19

An important determinant of velocity is the rate of interest.

Question 20

During the financial crisis of 2007-2009, both fiscal and monetary policy turned more expansionary.

Question 21

Asset price bubble is an increase in the price of assets that goes far beyond what can be justified by improving the fundamentals.

Question 22

If the Federal Reserve reduces short-term interest rates to virtually zero, and the economy still needs stimulus, it may want to turn to unconventional monetary policies.

Question 23

Some examples of conventional types of fiscal policy actions are changes in government purchases or in personal taxes.

Question 24

In the presence of long lags, attempts at stabilizing the economy may actually destabilize it.

Question 25

Critics of unconventional monetary policies argue that such operations take the Fed beyond its proper powers, may politicize it, and can unleash future inflation.

Question 26

Advocates of fixed rules believe that politicians focus more on reelection than on sound policy.

Question 27

Some examples of unconventional monetary policies are massive lending as the lender of last resort and large-scale purchases of atypical assets.

Question 28

Critics of the Fed's unconventional policies in 2009 and 2010 argued that determining which financial institutions would be bailed out and which would be allowed to fail was a political decision that rightfully belonged to Congress.

Question 29

The primary goal of central bankers is to mitigate the consequences of bubbles, not to prevent bubbles.

Question 30

The steepness of the aggregate supply curve schedule depends on the time frame.

Question 31

After September 11, 2001, a small group of economists argued that the economy's self-correcting mechanism would work to counteract the recessionary effects of the attack.

Question 32

The expenditure lags between fiscal actions and their effects on aggregate demand are probably fairly short.

Question 33

Most economists think that it is impossible to prevent asset price bubbles.

Question 34

Multiplier effect is the additional shifts in aggregate demand that result when expansionary fiscal policy increases income and thereby increases consumer spending.

Question 35

Advocates of activist policymaking point to the swift response of the Fed after September 11, 2001, as an example of effective policymaking.

Question 36

Monetary policy operates mainly on investment, which responds slowly to changes in interest rates.

Question 37

Stabilizing the economy by fiscal policy need not imply a tendency toward "big government."

Question 38

Monetarism is a mode of analysis that uses the equation of exchange to organize and analyze economic data.

Question 39

The Federal Reserve reduced the Fed funds rate to the 0-0.25 percent range in 2008 in response to the Lehman Brother's catastrophe.

Question 40

The monetary stimulus post-September 11, 2001, achieved some desired effects within the year.

Question 41

The main policy tool for manipulating consumer spending is personal income tax, but this tool takes time to have an effect.

Question 42

If nominal GDP is 8,100 billion florins and the money supply is 900 billion florins, the velocity of circulation is

A) 900.0.
B) 90.0.
C) 81.0.
D) 9.0.
E) 8.1.

Question 43

The equation of exchange is written as

A) M × V = P × Y .
B) M × P = V × Y .
C) M × Y = P × V .
D) M × Y = Y × P .

Question 44

During normal times, Fed pushes the federal funds down when it wants to give the economy a boost and

A) pushes it up when it wants to restrain the economy.
B) pushes it down when it wants to restrain the economy.
C) does not tamper with the federal funds when it wants to restrain the economy.
D) None of the above is correct.

Question 45

The velocity of circulation is the

A) speed at which the multiplier takes effect.
B) speed at which money circulates.
C) speed at which tax cuts get spent.
D) rate at which money creation takes place.

Question 46

Which is likely to be larger, the velocity of M1 or M2?

A) M1, because M2 is a larger number.
B) M2, because M1 is a larger number.
C) The velocities of both are approximately equal.
D) The numbers of velocity switch in relative size.

Question 47

A look at the historical data indicates that velocity for M1

A) has been more variable than the velocity for M2, but both have been fairly constant for the past 65 years.
B) and M2 have both trended downward, but velocity for M2 has been more erratic than velocity for M1.
C) has been fairly constant for the past 65 years, but velocity for M2 has trended downward.
D) has trended upward in the past 65 years, but velocity for M2 has been more constant.

Question 48

If you divide the amount of nominal GDP by the stock of money, you have computed the

A) multiplier.
B) price level.
C) velocity of circulation.
D) inflation rate.

Question 49

In the equation of exchange, velocity of money increases when

A) Y increases without any changes in P and M .
B) Y falls without any changes in P .
C) M increases without any changes in P and Y .
D) P falls without any changes in Y and M .

Question 50

The speed with which money circulates through the economy is called the

A) oversimplified multiplier.
B) velocity of circulation.
C) exchange rate.
D) money multiplier.

Question 51

Lags in stabilization policy refer to delays between the time when the need for stabilization policy arises and the time when the policy has its actual effects on the economy.

Question 52

The aggregate supply curve is likely to be relatively flat in the short run

A) but relatively steep in the long run.
B) and relatively flat in the long run.
C) but vertical in the long run.
D) None of the above is correct.

Question 53

One's opinion about the proper size of government should have nothing to do with one's view on stabilization policy.

Question 54

In 1996, if nominal GDP was about $8.5 thousand billion. The stock of money was

A) about the same as this.
B) much less than this.
C) much more than this.
D) unrelated to this number.

Question 55

_________ tend to be more intervention minded and hence more favorable disposed toward activist stabilization policies.

A) Liberals
B) Conservatives
C) Politicians
D) None of the above is correct.

Question 56

Which of the following is the formula for velocity?

A) Velocity = nominal GDP / real GDP
B) Velocity = real GDP / M
C) Velocity = ( P × Y ) / ( M × V )
D) Velocity = nominal GDP / M

Question 57

Forecasts of either the inflation or the real GDP growth rate for the year ahead typically err

A) by +1/2 to 1 percentage point.
B) by +2 to 4 percentage point.
C) by +3 to +5 percentage point.
D) None of the above is correct.

Question 58

The equation M × V = P × Y is called the

A) multiplier formula.
B) transactions formula.
C) equation of exchange.
D) balanced exchange formula.

Question 59

If nominal GDP is $7,700 billion and M1 is $1,000 billion, then velocity is

A) 10.7.
B) 7.7.
C) 7.1.
D) 7.0.

Question 60

In 2009, nominal GDP was $14,050 billion and M1 was $1,587 billion. Velocity was

A) 0.11.
B) 8.85.
C) 11.30.
D) 14.25.

Question 61

Is the equation of exchange an economic model?

A) Yes, it is a simple but powerful model.
B) No, economic models cannot be equations.
C) No, it is merely an arithmetic statement.
D) Yes, it is a cause-and-effect model.

Question 62

The efficiency of the payments' mechanism affects

A) the speed with which money can be exchanged for other assets.
B) how quickly individual loan applications will be approved.
C) how slowly individuals deplete their cash balances.
D) the speed with which financial institutions can process checks and other funds.

Question 63

Which of the following will increase the velocity of circulation?

A) Interest rates increase.
B) The inflation rate decreases.
C) Federal banking legislation abolishes credit cards.
D) Employers decide to pay employees once a month instead of once a week.

Question 64

If you assume that the equation of exchange is a dependable economic model, then the Fed can control

A) real GDP.
B) aggregate supply.
C) nominal GDP.
D) economic growth.

Question 65

The setting of the level of government spending and taxation by government policymakers is known as

A) fiscal policy.
B) monetary policy.
C) taxation policy.
D) None of the above is correct.

Question 66

When the Fed decreases the money supply, interest rates

A) rise, causing velocity to fall.
B) fall, causing velocity to fall.
C) rise, causing velocity to rise.
D) fall, causing velocity to rise.

Question 67

An employee of Macro.com Corporation is paid $5,000 a month, which she spends regularly throughout the month until she has a zero balance in her checking account at the end of the month. If the corporation changes to a semimonthly payroll schedule, how will the employee's average cash balance change? Assume she does not change her spending pattern when she is now paid twice a month.

A) It changes from $5,000 to $2,500 per month.
B) It changes from $2,500 to $1,250 per month.
C) It changes from $1,250 to $625 per month.
D) It changes from $500 to $250 per month.

Question 68

The equation of exchange can be written as

A) velocity × nominal GDP = price index.
B) real GDP × price index = money supply.
C) money supply × price index = real GDP.
D) money supply × velocity = nominal GDP.

Question 69

In order to consider the equation of exchange an economic model, what must we assume?

A) Real GDP is a constant value.
B) Changes in GDP cause changes in the money supply.
C) The money supply is constant.
D) Changes in velocity are small and predictable.

Question 70

If the Fed's monetary policy causes a substantial decrease in interest rates, what is the most likely impact on velocity?

A) Velocity will decrease.
B) Velocity will increase.
C) Velocity will remain constant.
D) Velocity is unrelated to interest rates.

Question 71

Nominal GDP is proportional to money stock when

A) velocity of money is volatile.
B) velocity of money is constant.
C) there are major changes in the value of velocity of money.
D) velocity of money is zero.

Question 72

The equation of exchange is an accounting identity that

A) relates the money supply to nominal GDP.
B) equates the demand for money with the supply of money.
C) relates the money supply to real GDP.
D) accounts use to balance assets and liabilities.

Question 73

What do most economists think is the most accurate statement about velocity?

A) Velocity is fairly constant in the short run but varies considerably in the long run, complicating predictions about nominal GDP.
B) M1 velocity is more stable in the short run than M2 velocity, and it has been a superior tool in predicting changes in nominal GDP.
C) Velocity is not constant in the short run, and predictions about nominal GDP have not fared well.
D) M2 velocity has been less stable than M1 velocity, but both are reliable enough to make accurate predictions about changes in nominal GDP.

Question 74

If the public decides to hold smaller cash balances, this will cause a(n)

A) increase in interest rates.
B) decrease in average paychecks.
C) increase in nominal GDP.
D) increase in velocity.

Question 75

Which of the following will reduce the velocity of circulation of the money stock?

A) The inflation rate increases.
B) The interest rate falls.
C) Credit cards are used more frequently.
D) More employees are paid once a week instead of once a month.

Question 76

When the Fed increases the money supply, interest rates

A) rise, causing velocity to fall.
B) fall, causing velocity to fall.
C) rise, causing velocity to rise.
D) fall, causing velocity to rise.

Question 77

The main policy tool for manipulating consumer spending is

A) personal income tax.
B) corporate income tax.
C) capital gains tax.
D) None of the above is correct.

Question 78

The quantity theory of money assumes that

A) velocity varies inversely with interest rates.
B) if velocity equals six, the Fed can increase nominal GDP by 30 percent if it increases the money supply by 5 percent.
C) changes in the money supply affect output but not prices.
D) changes in velocity are so small that velocity can be considered constant.

Question 79

Velocity is commonly calculated by which of the following formulas?

A) (Value of money stock) / (Value of nominal GDP)
B) (Value of transactions) / (Money stock)
C) (Value of financial transactions) / (GDP)
D) (Value of output) / (Value of input)

Question 80

If the Fed's monetary policy causes a substantial increase in interest rates, what is the most likely impact on velocity?

A) Velocity will decrease.
B) Velocity will increase.
C) Velocity will remain constant.
D) Velocity is unrelated to interest rates.