Question 1

If M = 200, P = 100, and Q = 10, then V is:
A) 20.
B) 2.
C) 10.
D) 5.
E) 2,000.

Accepted Answer

The answer of If M = 200, P = 100,...

Question 2

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 Fed should expand the money supply at a constant rate.

Accepted Answer

The monetary rule is a view held exclusively by monetarists that the Federal Reserve should expand the money supply at a constant rate in order to achieve steady economic growth and low inflation.

Question 3

According to the quantity theory of money, if an economy produces 100 units of output and has a money supply equal to $500, then if the money supply doubles 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) double.
E) more than double.

Accepted Answer

According to the quantity theory of money, MV = PQ, where M is the money supply, V is the velocity of money, P is the price level, and Q is the level of real output. Since V is constant, if M doubles, then PQ must also double. Since Q is fixed at 100 units of output, P must double in order for PQ to double. Therefore, the new price level will double.

Question 4

The assumption that the velocity of money and the quantity being produced is constant is held by the:
A) Keynesian school.
B) supply-side school.
C) neo-Keynesian school.
D) rational expectations school.
E) classical school.

Accepted Answer

The assumption of constant velocity of money and constant production levels is a key aspect of the classical school of thought in economics. This school believes that the economy operates at full employment and that any disturbances in the economy will be self-correcting in the long run, thus leading to a stable equilibrium.

Question 5

Monetarists believe that:
A) velocity is constant.
B) velocity is highly predictable.
C) there are three motives for demanding money.
D) changes in the money supply cause changes in velocity.
E) a change in the money supply can affect real GDP.

Accepted Answer

Monetarists believe that velocity is highly predictable, which allows them to argue that changes in the money supply have predictable effects on nominal GDP.

Question 6

The quantity theory of money assumes that the velocity of money:
A) is constant.
B) will rise if the money supply rises and fall if the money supply falls.
C) will rise if the money supply rises, but it will not change if the money supply falls.
D) will fall if the money supply rises, and it will rise if the money supply falls.
E) will fall if the money supply rises, but it will not change if the money supply falls.

Accepted Answer

The quantity theory of money assumes that the velocity of money is constant. This means that the number of times a unit of currency is used to purchase goods and services within a given time period remains unchanged in the short run. Therefore, changes in the money supply will have a proportional impact on the price level in the economy.

Question 7

The belief that the velocity of money is not constant but highly predictable is associated with the:
A) classical school.
B) Keynesian school.
C) supply-side school.
D) rational expectations school
E) monetarist school.

Accepted Answer

The belief that the velocity of money is predictable and not constant is a core principle of the monetarist school, which emphasizes the importance of the quantity of money in determining economic activity.

Question 8

Since classical economists and monetarists believe that the economy operates at full employment, real GDP, that is, along the vertical segment of aggregate supply:
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.
E) any increase in the money supply will cause both nominal and real GDP to increase.

Accepted Answer

Classical economists and monetarists believe in the vertical segment of aggregate supply at full employment level. An increase in the money supply will only result in an increase in the price level, as the economy is already at full employment level of output. This is because an increase in the money supply will lead to an increase in demand for goods and services, but since the economy is at full employment, the supply of goods and services cannot be increased, which results in higher prices.

Question 9

The equation specifying a direct relationship between the money supply and prices is the quantity theory of:
A) money.
B) prices.
C) exchange.
D) spending.
E) dollars.

Accepted Answer

The quantity theory of money establishes that the money supply in an economy is proportional to the price level of goods and services. In other words, an increase in the money supply will cause a proportional increase in prices, assuming all else remains constant. Therefore, the direct relationship between the money supply and prices is best captured by the quantity theory of money.

Question 10

Monetarists believe:
A) the cause-and-effect relationship hypothesized by the Keynesians understates the impact of stimulative monetary policy.
B) the cause-and-effect relationship hypothesized by the Keynesians is an accurate description of how monetary policy works.
C) since the economy is operating at full employment, any stimulative monetary policy will cause the inflation rate to rise.
D) the cause-and-effect relationship hypothesized by the Keynesians is backwards, and decreases in the money supply actually stimulate economic activity.
E) the cause-and-effect relationship hypothesized by Keynesians will not work because investment does not respond to changes in interest rates.

Accepted Answer

Monetarists believe that the economy tends to operate at or near full employment, and thus any stimulative monetary policy primarily leads to inflation rather than increases in output.

Question 11

In the quantity theory of money:
A) the price level is a function of the supply of money.
B) the supply of money is a function of the price level.
C) the money supply and the price level are inversely related.
D) the money supply is controlled by the government.

Accepted Answer

The quantity theory of money states that the general price level in an economy is directly proportional to the supply of money in the economy. Therefore, the price level is a function of the supply of money, making choice A the correct answer.

Question 12

Classical economists believe that an increase in the money supply will lead to:
A) only c and d.
B) all of the following.
C) an increase in the price level.
D) an increase in nominal GDP.
E) an increase in real GDP.

Accepted Answer

The answer of Classical economists believe that an increase in...

Question 13

According to the quantity theory of money, if an economy produces 5,000 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.
E) $8,000.

Accepted Answer

According to the quantity theory of money, MV=PQ, where M is the money supply, V is the velocity of money, P is the price level, and Q is the quantity of goods and services produced. Solving for P, we get P=MV/Q. Plugging in the numbers, we get P=($40,000 x 1)/5,000 = $8. Therefore, the correct answer is C.

Question 14

Classical economists believe that:
A) velocity is not constant.
B) changes in the money supply affect real GDP.
C) the quantity of money explains prices..
D) the money supply affects velocity.

Accepted Answer

Classical economists believe in the Quantity Theory of Money, which states that the quantity of money in circulation determines the level of prices. This means that changes in the money supply will ultimately lead to changes in the general price level.

Question 15

According to the classical view,
A) velocity is constant, which means changes in price will cause changes in price or quantity.
B) quantity is constant, which means changes in the money supply could cause either changes in velocity or changes in prices.
C) velocity and price are constant so that changes in the money supply causes changes in quantity.
D) velocity and quantity are constant so that changes in the money supply cause changes in prices.
E) velocity is constant while quantity is variable so that changes in the money supply change both price and quantity.

Accepted Answer

According to the classical view, velocity and quantity are constant while changes in the money supply cause changes in prices.

Question 16

Monetarists accept the idea that velocity is not constant; nonetheless, they believe that it is still highly:
A) constant.
B) unpredictable, ill-behaved, and independent of money supply.
C) unpredictable, well-behaved, and dependent of money supply.
D) predictable.
E) variable.

Accepted Answer

Monetarists believe that while velocity is not constant, it is predictable and follows a stable pattern over time, allowing them to use it in their economic models.

Question 17

If V = 5, P = 100, and Q = 10, then M is:
A) 20.
B) 10.
C) 500.
D) 1,000.
E) 200.

Accepted Answer

The relationship between the variables is not given, but if we assume M = P * Q / V, then M = 100 * 10 / 5 = 200.

Question 18

Monetarists and classical economists:
A) assume that stimulative monetary policy will create high levels of GDP without inflation.
B) assume that stimulative monetary policy will create high levels of GDP and slightly high prices.
C) assume the economy operates at full employment and stimulative monetary policy will only cause the price level to rise.
D) assume that the economy operates at full employment and stimulative monetary policy will increase both aggregate supply and aggregate demand.
E) assume that the Keynesian description of monetary policy underestimates the true stimulative effect of an increase in the money supply.

Accepted Answer

Monetarists and classical economists assume that the economy operates at full employment and that stimulative monetary policy will only cause the price level to rise, not increase output. They hold the view that inflation is caused by an excess supply of money, and that long-term, sustained growth can only be achieved through increases in the supply of goods and services (aggregate supply).

Question 19

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.
E) the economy does not always operate at full employment.

Accepted Answer

Classical economists believed in the quantity theory of money, which assumes a constant velocity of money. This means that changes in the money supply only affect prices, not real GDP or employment.

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.
E) P rises

Accepted Answer

According to the quantity theory of money, MV= PQ. If the growth of money supply, M, is lower than the growth of output, Q, it means that V (velocity of money) must fall in order to maintain the equation. This implies that each dollar of money supply is being used to purchase fewer goods and services. As a result, prices, P, must fall. Therefore, the correct answer is D.

Quiz 20: Policy Disputes Using the Self-Correcting Aggregate Demand and Supply Model

If M = 200, P = 100, and Q = 10, then V is:

The monetary rule is the view of the:

According to the quantity theory of money, if an economy produces 100 units of output and has a money supply equal to $500, then if the money supply doubles while velocity remains constant, the new price level will:

The assumption that the velocity of money and the quantity being produced is constant is held by the:

Monetarists believe that:

The quantity theory of money assumes that the velocity of money:

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

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

The equation specifying a direct relationship between the money supply and prices is the quantity theory of:

Monetarists believe:

In the quantity theory of money:

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

According to the quantity theory of money, if an economy produces 5,000 units of output, its money supply equals $40,000 and the velocity of money equals one, then the price level will equal:

Classical economists believe that:

According to the classical view,

Monetarists accept the idea that velocity is not constant; nonetheless, they believe that it is still highly:

If V = 5, P = 100, and Q = 10, then M is:

Monetarists and classical economists:

Classical economists traditionally believed that:

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