Deck 17: Macroeconomic Policy I: Monetary Policy

Question 1

The V in the equation of exchange represents the:

A) variation in the GDP.
B) variation in the CPI.
C) variation in real GDP.
D) average number of times per year a dollar is spent on final goods and services.

Answer 1

D

Question 2

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

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.

Answer 2

A

Question 3

The primary goal of the RBA is to:

A) keep inflation low in order to generate sustainable growth.
B) maintain full employment.
C) ensure the economic prosperity of Australian people.
D) keep interest rates low.

Answer 3

A

Question 4

According to Keynesians, for monetary policy to have a stimulative effect on GDP, a/an:

A) increase in the money supply is needed which lowers the interest rate in order to stimulate higher levels of investment.
B) increase in the money supply is needed which lowers the interest rate in order to lower levels of investment.
C) decrease in the money supply is needed which lowers the interest rate in order to stimulate higher levels of investment.
D) decrease in the money supply is needed which causes the interest rate to rise in order to stimulate higher levels of investment.

Question 5

According to the classical economists' equation of exchange if the money supply is $20 million and the total spending is $100 million, then the velocity of money is:

A) 0.5.
B) $5
C) $120 million.
D) 5.

Question 6

The Keynesian cause-and-effect sequence predicts that a decrease in the money supply will cause interest rates to:

A) fall, boosting investment and shifting the AD curve rightward, leading to an increase in real GDP.
B) fall, boosting investment and shifting the AD curve rightward, leading to a decrease in real GDP.
C) rise, cutting investment and shifting the AD curve rightward, leading to an increase in real GDP.
D) rise, cutting investment and shifting the AD curve leftward, leading to a decrease in real GDP.

Question 7

The RBA believes that by keeping inflation low and steady it can assist with:

A) the achievement of low prices over the medium to long term.
B) the achievement of slow and steady economic growth over the medium to long term.
C) the achievement of full unemployment and slow and steady economic growth over the medium to long term.
D) the achievement of full employment and high economic growth over the medium to long term.

Question 8

The velocity of money is the:

A) number of times per year each dollar is used to transact an exchange.
B) rapidity of price increases during inflation.
C) number of times the price level increases during a year.
D) time it takes for cheques to clear banks.

Question 9

Monetarists believe that an increase in the money supply will lead to:

A) an increase in real GDP.
B) an increase in leisure time.
C) an increase in the price level.
D) a decrease in nominal GDP.

Question 10

According to Keynesians, an increase in the money supply will have its greatest impact on GDP when the aggregate demand curve intersects:

A) the vertical portion of the aggregate supply curve.
B) the upward-sloping portion of the aggregate supply curve.
C) the horizontal portion of the aggregate supply curve.
D) either the upward-sloping or the vertical portions of the aggregate supply curve.

Question 11

If M stands for the money supply, V for the velocity of money, P for the average selling price, and Q for the output of goods and services, the equation of exchange is:

A) MP = VQ.
B) MV = PQ.
C) MQ = VP.
D) MP = PQ.

Question 12

The inflation target of the RBA is:

A) 2-3 per cent at all times.
B) 2-3 per cent over the course of the business cycle.
C) zero per cent at all times.
D) zero per cent over the course of the business cycle.

Question 13

Since classical economists and monetarists believe that the economy operates at full employment, real GDP, that is, along the vertical segment of aggregate supply, then:

A) any increase in the money supply can only end up raising the price level.
B) any increase in the money supply can only end up lowering the price level.
C) any decrease in the money supply can only end up raising the price level.
D) changes in the money supply will not affect the price level.

Question 14

The goal of the monetary policy in Australia:

A) is to help low-income earners find a better job.
B) is to provide everyone with a high income.
C) is to keep the interest rates as high as possible.
D) is to keep inflation between 2 and 3 per cent.

Question 15

According to the equation of exchange, the money supply multiplied by the average number of times per year a dollar is spent on final goods and services is equal to:

A) marginal spending.
B) unemployment.
C) total spending.
D) price level.

Question 16

The monetarist transmission mechanism, through which monetary policy affects the price level, real GDP and employment, depends on the:

A) indirect impact of changes on the interest rate.
B) indirect impact of changes on profit expectations.
C) direct impact of changes in fiscal policy on aggregate demand.
D) direct impact of changes in the money supply on aggregate demand.

Question 17

Causality is clear and mechanical with the quantity theory of money. If M increases because V and Q are:

A) variable, the price level, P, increases.
B) variable, the price level, P, decreases.
C) constant, the price level, P, increases.
D) constant, the price level, P, decreases.

Question 18

The average number of times per year each dollar is used to transact an exchange is known as the:

A) liquidity of money.
B) velocity of money.
C) quantity theory of money.
D) equation of exchange.

Question 19

Since classical economists believe that both V and Q are constants for an economy in short-run equilibrium, the equation of exchange becomes a theory in which:

A) the quantity of money explains prices.
B) the quantity of money explains velocity.
C) the quantity of money explains real GDP.
D) changes in M cause changes in V.

Question 20

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

A) V falls.
B) V rises.
C) P stays the same.
D) P falls.

Question 21

If the velocity of money is 5 and the supply of money is $200 billion, then real GDP is:

A) $66.67 billion.
B) $200 billion.
C) $600 billion.
D) indeterminate as there is no information about nominal GDP.

Question 22

The reduction in aggregate demand would:

A) slow the economy down and increase the rate of inflation.
B) speed the economy up keeping the rate of inflation unchanged.
C) slow the economy down and reduce the rate of inflation.
D) speed the economy up and reduce the rate of inflation.

Question 23

If the velocity of money = 1, then the money supply will be:

A) equal to the price level.
B) equal to nominal GDP.
C) equal to real GDP.
D) equal to the difference between nominal and real GDP.

Question 24

Which of the following is a belief of the monetarists?

A) They think the problems of Great Depression were solved by monetary policy.
B) They believe monetary policy is transmitted to the economy only through its effect on interest rates and planned investment.
C) They do not believe that the interest-investment curve is vertical.
D) They do not believe monetary policy is transmitted to the economy only through its effect on interest rates and planned investment.

Question 25

Which of the following is a reason for the Keynesian view that monetary policy plays a minor role in affecting the economy?

A) The money demand curve is vertical.
B) The investment curve is very steep.
C) The money demand curve is horizontal at any interest rate.
D) The monetary rule.

Question 26

According to classical economists:

A) prices are rigid.
B) both V and Q are variable for an economy in short-run equilibrium.
C) changes in M cause changes in V.
D) the velocity of money is constant.

Question 27

According to Keynes:

A) monetary policy acts directly causing changes in investment and aggregate demand.
B) monetary policy acts too slowly to cause any changes in aggregate demand.
C) monetary policy acts indirectly causing changes in interest rates but not in investment and aggregate demand.
D) monetary policy acts indirectly causing changes in interest rates first before affecting investment and aggregate demand.

Question 28

Which of the following is an important issue in the Keynesian-monetarist debate?

A) The relative importance of international policy.
B) The nature of the transmission mechanism through which a change in employment affects the economy.
C) The shape of the supply-demand curve.
D) The shape of the investment-demand curve.

Question 29

According to the quantity theory of money, if an economy produces 5000 units of output, its money supply equals $40 000 and the velocity of money equals one, then the price level will equal:

A) $0.13.
B) $1.25.
C) $8.
D) $200.

Question 30

Which of the following is true?

A) Keynesians advocate increasing the money supply during economic recessions but decreasing the money supply during economic expansions.
B) Monetarists advocate decreasing the money supply by a constant rate year after year.
C) Keynesians argue that the crowding-out effect is significant.
D) Monetarists argue that the crowding-out effect is very small.

Question 31

Most monetarists recognise that:

A) the velocity of money is constant over time and that the economy does not operate at full employment all the time.
B) the velocity of money is not constant over time and that the economy always operates at full employment.
C) the velocity of money is not predictable and that the economy always operates at full employment.
D) the velocity of money is not constant over time and that the economy does not operate at full employment all the time.

Question 32

The equation of exchange (MV = PY) is:

A) a theory, because no one knows what the value of V is.
B) used by Keynesian economists to justify the monetarist transmission mechanism.
C) only held if V is constant.
D) an accounting identity and is by definition true.

Question 33

Monetarists and classical economists assume that:

A) stimulative monetary policy will create high levels of GDP without inflation.
B) stimulative monetary policy will create high levels of GDP and slightly high prices.
C) the economy operates at full employment and stimulative monetary policy will only cause the price level to rise.
D) the economy operates at full employment and stimulative monetary policy will increase both aggregate supply and aggregate demand.

Question 34

Classical economists traditionally believed that:

A) there are three motives for demanding money.
B) a change in the money supply can affect real GDP.
C) the transactions demand for money influences the velocity of money.
D) the velocity of money is constant.

Question 35

The belief that the velocity of money is not constant, but is highly predictable, is associated with the:

A) classical school.
B) Keynesian school.
C) supply-side school.
D) monetarist school.

Question 36

While the classicists believed that both velocity and output are stable, Keynesians believe:

A) velocity is stable and output is variable.
B) velocity and output are both variable.
C) output is stable and velocity is variable.
D) the same as the classical economists: that both output and velocity are stable.

Question 37

According to the quantity theory of money, if the money supply is increased by 1.5 times while velocity remains constant, the new price level will:

A) fall to half its initial level.
B) fall, but it will not fall all the way to half its initial level.
C) increase, but it will not double.
D) increase by 1.5 times.

Question 38

If nominal GDP is $500 billion, the money supply is $100 billion and the velocity of money is 5, then real GDP is:

A) $20 billion.
B) $100 billion.
C) $500 billion.
D) indeterminate as there is no information about nominal GDP.

Question 39

If the money supply = $100 billion, nominal GDP = $400 billion, then the velocity of money is:

A) 0.67.
B) 1.5.
C)2.
D) 4.

Question 40

If the velocity of money is 3, nominal GDP is $300 billion, then the supply of money is:

A) $100 billion.
B) $50 billion.
C) $2500 billion.
D) $2 billion.

Question 41

Countercyclical macroeconomic policy is favoured by:

A) Keynesian economists.
B) monetarists.
C) classical economists.
D) microeconomists.

Question 42

The policy effectiveness lag refers to the time it takes for:

A) the government to make up its mind about what to do.
B) the government to discover the fluctuation in the economy.
C) the economy to get back to full employment.
D) the policy response to impact on economic activity.

Question 43

According to the quantity theory of money, if the money supply doubles, the:

A) output level must also triple.
B) velocity must also double.
C) output level must also double.
D) price level must also double.

Question 44

According to monetarists:

A) if the money supply is expanding too much, lower rates of inflation will be likely.
B) if the money supply is expanding too slowly, the unemployment rate may increase.
C) if the money supply is expanding too slowly, prices may increase.
D) if the money demand is expanding too much, lower rates of inflation will be likely.

Question 45

The time before information about the current phase of economic activity in the real world becomes available is called the:

A) delay time.
B) appropriate time.
C) important time.
D) information lag.

Question 46

One thing monetarists and Keynesians agree on is:

A) that monetary policy is ineffective in controlling inflation.
B) the monetary transmission mechanism.
C) that the velocity of money is constant.
D) that monetary policy will impact mainly on demand in the short run.

Question 47

Monetarists argue that the central bank should allow the money supply to grow:

A) counter to the business cycles.
B) faster than 10 per cent annually.
C) only during recessions.
D) at a constant rate.

Question 48

According to monetarists:

A) money supply directly determines changes in prices, real GDP and employment.
B) monetary policy acts too slowly to cause any changes in aggregate demand.
C) monetary policy acts indirectly causing changes in interest rates but not in investment and aggregate demand.
D) monetary policy acts indirectly causing changes in interest rates first before affecting investment and aggregate demand.

Question 49

According to the quantity theory of money, any change in the money supply:

A) must lead to an inverse change in the price level.
B) must lead to an exponential change in the price level.
C) does not lead to any change in the price level.
D) must lead to a proportional change in the price level.

Question 50

One of the potential difficulties in following a rules-based approach to monetary policy is:

A) that interest rates will be stable.
B) that the relationship between the money supply and inflation can be weak in the short run.
C) that the velocity of money is fully predictable.
D) that the policy outcome is desirable.

Question 51

Monetarists argue that setting a specific target for money supply is the best policy because:

A) there are no lags in policy making.
B) the central bank does not make the target publicly available.
C) changes in interest rates can take up to 18 months to work their way through the
Economy.
D) the velocity of money is not predictable.

Question 52

Monetarists argue that active discretionary monetary policy will:

A) reduce economic fluctuations.
B) increase economic fluctuations.
C) have no information lag.
D) be effective immediately.

Question 53

According to monetarists:

A) if the money supply is expanding too much, higher rates of inflation will be likely.
B) if the money supply is expanding too slowly, the unemployment rate will decline.
C) if the money supply is expanding too slowly, prices will grow.
D) if the money supply is shrinking, higher rates of inflation will be likely.

Question 54

If the central bank announces that it is going to increase the money supply by 6 per cent this year, it is following:

A) a demand-based approach.
B) a discretionary monetary policy.
C) a discretionary fiscal policy.
D) a monetarist approach.

Question 55

Which of the following is the equation of exchange?

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

Question 56

The expression, 'Don't do something, just stand there' applies to economists who favour a/an _____ approach to monetary policy.

A) discretionary
B) interventionist
C) expansionary
D) rules-based

Question 57

Monetarists argue that using active discretionary monetary policy is dangerous because it is subject to:

A) information lags.
B) long-term policy determination lags.
C) short-term policy effectiveness lags.
D) information, policy determination and policy effectiveness lags.

Question 58

The monetary rule is the view of the:

A) Keynesians, that monetary policy is most important.
B) monetarists that monetary policy is most important.
C) classical economists that monetary policy is most important.
D) monetarists that the RBA should expand the money supply at a constant rate.

Question 59

'Statistics released show that real GDP contracted by 0.7 per cent in the previous quarter.' This statement highlights the _____ lag of monetary policy.

A) policy implementation
B) effectiveness
C) information
D) monetary

Question 60

The monetarists argued that to avoid inflation and unemployment, that:

A) the money supply growth rate has to be maintained at the highest level.
B) the money demand growth rate has to be maintained at the proper level.
C) the money supply growth rate has to be maintained at the proper level.
D) the interest rates have to be maintained at the proper level.

Question 61

A rules-based approach to monetary policy is likely to be more effective when the velocity of money is:

A) volatile.
B) zero.
C) stable.
D) equal to the inflation rate.

Question 62

Australia:

A) did not implement monetarist policy during 1976-85.
B) has only used the classical economics approach in designing monetary policy.
C) rejected a monetarist policy during 1976-85.
D) implemented a monetarist policy during 1976-85.

Question 63

Which of the following statements is correct with respect to monetary policy?

A) Targeting the money supply is likely to be more successful when the demand for money is volatile.
B) When the velocity of money is stable, targeting the money supply is likely to be completely ineffective.
C) Interest rates will always be stable if the central bank keeps the growth in the money supply stable.
D) Australia's very high rates of inflation in the early 1970s lead to the monetary targeting in terms of the growth of the monetary aggregate, M3.

Question 64

The 'conditional-projections' for the growth of the monetary aggregate, M3, were conditional because:

A) they were conditional on government policies.
B) they depended on local industrial conditions.
C) they depended on the world or domestic economic conditions.
D) they depended on the climate change.

Question 65

One reason the demand for money became more volatile in Australia during the mid-1980s was:

A) the supply of money was more volatile.
B) the government imposed new restrictions on financial institutions.
C) the government began deregulating financial institutions.
D) the government capped interest rates.

Question 66

All economists would agree that velocity:

A) may be variable over the long term.
B) may be variable over the short term.
C) cannot be defined over the short term.
D) may be stable over the long term.

Question 67

If the central bank decides to keep the increase in the money supply constant and the velocity of money turns out to be lower than expected, then:

A) higher unemployment may result.
B) lower unemployment may result.
C) inflation will be higher than expected.
D) inflation will be unaffected, but unemployment will be lower.

Question 68

If the central bank follows a rules-based approach to monetary policy and the velocity of money turns out to be larger than expected, then inflation:

A) will be lower than expected.
B) will be higher than expected.
C) will be unaffected.
D) could be higher or lower than expected.

Question 69

The rules-based approach to monetary policy was followed in Australia:

A) between 1976-85.
B) from 1991 to the present.
C) between 1960-74.
D) during the Second World War.

Question 70

Monetary targeting was abandoned in Australia because:

A) the demand for money became more stable.
B) the supply of money became more volatile.
C) the velocity of money became more volatile.
D) the velocity of money became more stable.

Question 71

Financial innovation in Australia during the 1980s led to:

A) the demand for money increasing.
B) the velocity of money becoming more stable.
C) the velocity of money becoming more volatile.
D) the demand for money becoming more stable.

Question 72

The 'conditional-projection' approach used by the Australian government in monetary policy between 1976 and 1985 was based on:

A) the monetarist view of inflation.
B) the Keynesian view of inflation.
C) the fact that the demand for money was highly volatile.
D) the fact that the velocity of money was highly volatile.

Question 73

A volatile velocity of money is, according to Keynesians, equivalent to saying:

A) the supply of money is volatile.
B) the demand for money is stable.
C) the supply of money is stable.
D) the demand for money is volatile.

Question 74

The time taken to decide on an appropriate policy response is known as the:

A) information lag.
B) policy determination lag.
C) policy response lag.
D) policy effectiveness lag.

Question 75

If the supply of money is stable while the demand for money is volatile, the likely result will be that:

A) interest rates will remain constant.
B) inflation rates will remain constant.
C) interest rates will become more volatile.
D) the velocity of money will fall.

Question 76

Which of the following statements is least likely to be true?

A) By targeting the growth in the money supply, the government will be more successful in keeping inflation low if the demand for money becomes volatile.
B) Targeting the growth in the money supply will be more successful in keeping inflation low if the velocity of money is stable.
C) The demand for money influences the velocity of money.
D) A rules-based approach to monetary policy will be less effective when the demand for money is volatile.

Question 77

The Australian inflation rate was:

A) the highest in 1974-75.
B) the lowest in 1974-75.
C) the highest in 1991-92.
D) the lowest in 1982-83.

Question 78

Keynesians argue that the velocity of money is:

A) constant over time.
B) stable over time.
C) constant in the short run, but volatile in the long run.
D) volatile.

Question 79

Since the early 1980s, the velocity of money in Australia has been:

A) volatile, but increases in velocity have been matched by decreases in velocity.
B) steadily declining.
C) steadily increasing.
D) constant.

Question 80

If the central bank follows a rules-based approach to monetary policy and the velocity of money turns out to be smaller than expected, then inflation:

A) will be lower than expected.
B) will be higher than expected.
C) will be unaffected.
D) could be higher or lower than expected.