Question 1

For the classical economists,the quantity theory of money provided an explanation of movements in the price level. Changes in the price level result

Accepted Answer

The answer of For the classical economists,the quantity theory of...

Question 2

Fisher's quantity theory of money suggests that the demand for money is purely a function of ________,and ________ no effect on the demand for money.

Accepted Answer

Fisher's quantity theory of money posits that the demand for money is primarily driven by income levels, and interest rates do not affect the demand for money. This theory focuses on the transactional need for money, which increases with income, rather than speculative or precautionary motives that might be influenced by interest rates.

Question 3

Methods of financing government spending are described by an expression called the government budget constraint,which states the following

Accepted Answer

The expression for the government budget constraint is DEFICIT = (G - T)= ΔMB + ΔBONDS, which means that the government deficit (DEFICIT) is equal to the difference between government spending (G) and tax revenue (T), which is financed through an increase in the monetary base (ΔMB) and/or an increase in government borrowing (ΔBONDS).

Question 4

Financing government spending with taxes

Accepted Answer

Financing government spending with taxes does not directly alter the monetary base because it involves redistributing existing money rather than changing the total amount of money or reserves in the banking system.

Question 5

According to the quantity theory of money demand

Accepted Answer

The quantity theory of money demand posits that the demand for money is determined by the nominal GDP (not by interest rates), implying that interest rates do not directly affect the demand for money according to this theory.

Question 6

If the government finances its spending by selling bonds to the central bank,the monetary base will ________ and the money supply will ________.

Accepted Answer

When the government sells bonds to the central bank, the central bank pays for these bonds by creating new reserves, which increases the monetary base. Banks can then use these reserves to create more loans, which increases the money supply.

Question 7

The classical economists' contention that prices double when the money supply doubles is predicated on the belief that in the short run velocity is ________ and real GDP is ________.

Accepted Answer

The classical economists' belief that prices double when the money supply doubles is based on the Quantity Theory of Money, which assumes that in the short run, the velocity of money (the rate at which money circulates in the economy) is constant and that real GDP (the total value of all goods and services produced adjusted for inflation) is also constant. This theory suggests that any change in the money supply directly affects the price level, assuming other factors remain unchanged.

Question 8

The quantity theory of inflation indicates that if the aggregate output is growing at 3% per year and the growth rate of money is 5%,then inflation is

Accepted Answer

The quantity theory of inflation suggests that inflation occurs when the money supply grows at a faster rate than the economy's output. Here, with a 5% growth in money supply and a 3% growth in output, inflation would be the difference, which is 2%.

Question 9

Irving Fisher's view that velocity is fairly constant in the short run transforms the equation of exchange into the

Accepted Answer

Fisher's view that velocity is fairly constant in the short run is a central tenet of the quantity theory of money, which posits that changes in the money supply lead to proportional changes in prices. Therefore, the equation of exchange (MV = PQ) is a representation of the quantity theory of money, which predicts that changes in the money supply will be reflected in changes in prices.

Question 10

________ quantity theory of money suggests that the demand for money is purely a function of income,and interest rates have no effect on the demand for money.

Accepted Answer

Fisher's quantity theory of money states that the demand for money is solely dependent on income, and interest rates do not have any effect on it. This theory suggests that an increase in the money supply will lead to inflation, as the demand for money will remain constant while the supply increases.

Question 11

Methods of financing government spending are described by an expression called the government budget constraint,which states the following

Accepted Answer

The government budget constraint indicates that the government budget deficit is financed either by creating new money (increasing the monetary base) or by issuing new bonds to the public. Thus, the deficit equals the sum of these two changes.

Question 12

Cutting the money supply by one-third is predicted by the quantity theory of money to cause

Accepted Answer

According to the quantity theory of money, the price level is directly proportional to the money supply. Therefore, a one-third cut in the money supply is predicted to cause a one-third decline in the price level in the long run. This is because the quantity of money available to purchase goods and services is reduced, leading to deflationary pressures. There is no direct impact on real output, so options A and B are incorrect. Option C is also incorrect as it implies a decline in output in addition to the decline in the price level, which is not predicted by the quantity theory of money.

Question 13

Empirical evidence shows that the quantity theory of money is a good theory of inflation

Accepted Answer

The quantity theory of money suggests that inflation depends on the growth rate of money supply relative to the growth rate of real GDP. In the long run, this theory holds true as a sustained increase in the supply of money will result in higher prices. However, in the short run, other factors such as changes in demand or supply shocks may affect prices. Therefore, empirical evidence supports the choice A as the best answer.

Question 14

The view that velocity is constant in the short run transforms the equation of exchange into the quantity theory of money. According to the quantity theory of money,when the money supply doubles

Accepted Answer

According to the quantity theory of money, nominal income (P x Y) is equal to the money supply (M) multiplied by velocity (V). If velocity is assumed constant in the short run, then a doubling of the money supply would lead to a doubling of nominal income (D).

Question 15

The classical economists' conclusion that nominal income is determined by movements in the money supply rested on their belief that ________ could be treated as ________ in the short run.

Accepted Answer

Classical economists believed that the velocity of money could be treated as constant in the short run, which led them to conclude that changes in the money supply directly affect nominal income.

Question 16

The quantity theory of inflation indicates that the inflation rate equals

Accepted Answer

The quantity theory of inflation establishes a direct relationship between the growth rate of the money supply and the inflation rate. According to this theory, inflation is caused by an increase in the money supply that outstrips the growth rate of aggregate output. Therefore, the inflation rate equals the growth rate of the money supply minus the growth rate of aggregate output.

Question 17

If initially the money supply is $2 trillion,velocity is 5,the price level is 2,and real GDP is $5 trillion,a fall in the money supply to $1 trillion

Accepted Answer

According to the quantity theory of money, MV = PY, where M is the money supply, V is velocity, P is the price level, and Y is real GDP. If M decreases to $1 trillion and V remains constant at 5, then PY also decreases to $2.5 trillion. To maintain the equation, P must decrease to 1. Therefore, the correct answer is C. The decrease in M does not necessarily cause a change in velocity, so choices A, B, and D are incorrect.

Question 18

If initially the money supply is $1 trillion,velocity is 5,the price level is 1,and real GDP is $5 trillion,an increase in the money supply to $2 trillion

Accepted Answer

The equation of exchange in economics, given by MV = PQ, where M is the money supply, V is the velocity of money, P is the price level, and Q is the real GDP, can be used to understand the impact of changing the money supply. Initially, M = $1 trillion, V = 5, P = 1, and Q = $5 trillion. When M increases to $2 trillion, and assuming V and Q remain constant, the only variable that can adjust to maintain the equality is P, the price level. Doubling M from $1 trillion to $2 trillion, with V and Q constant, necessitates that P doubles to maintain the equation's balance, making the price level increase to 2.

Question 19

If the government finances its spending by issuing debt to the public,the monetary base will ________ and the money supply will ________.

Accepted Answer

When the government finances its spending by issuing debt to the public, it is essentially borrowing from the public by selling government bonds. This action does not directly affect the monetary base (the total amount of a currency that is either in general circulation in the hands of the public or in the commercial bank deposits held in the central bank's reserves). The monetary base remains unchanged because this process involves swapping bonds for money among the public and does not involve the central bank altering the amount of reserves held by banks or currency in circulation. Similarly, the money supply does not change directly as a result of this action; it merely involves the public exchanging money for government bonds, without altering the total amount of money in circulation.

Question 20

The classical economists believed that if the quantity of money doubled

Accepted Answer

According to classical economists, the quantity theory of money states that there is a direct relationship between the quantity of money in circulation and the level of prices. Therefore, if the quantity of money doubled, prices would also double.

Quiz 19: Quantity Theory, inflation and the Demand for Money

For the classical economists,the quantity theory of money provided an explanation of movements in the price level. Changes in the price level result

Fisher's quantity theory of money suggests that the demand for money is purely a function of ,and no effect on the demand for money.

Methods of financing government spending are described by an expression called the government budget constraint,which states the following

Financing government spending with taxes

According to the quantity theory of money demand

If the government finances its spending by selling bonds to the central bank,the monetary base will and the money supply will .

The classical economists' contention that prices double when the money supply doubles is predicated on the belief that in the short run velocity is and real GDP is .

The quantity theory of inflation indicates that if the aggregate output is growing at 3% per year and the growth rate of money is 5%,then inflation is

Irving Fisher's view that velocity is fairly constant in the short run transforms the equation of exchange into the

________ quantity theory of money suggests that the demand for money is purely a function of income,and interest rates have no effect on the demand for money.

Methods of financing government spending are described by an expression called the government budget constraint,which states the following

Cutting the money supply by one-third is predicted by the quantity theory of money to cause

Empirical evidence shows that the quantity theory of money is a good theory of inflation

The view that velocity is constant in the short run transforms the equation of exchange into the quantity theory of money. According to the quantity theory of money,when the money supply doubles

The classical economists' conclusion that nominal income is determined by movements in the money supply rested on their belief that could be treated as in the short run.

The quantity theory of inflation indicates that the inflation rate equals

If initially the money supply is $2 trillion,velocity is 5,the price level is 2,and real GDP is $5 trillion,a fall in the money supply to $1 trillion

If initially the money supply is $1 trillion,velocity is 5,the price level is 1,and real GDP is $5 trillion,an increase in the money supply to $2 trillion

If the government finances its spending by issuing debt to the public,the monetary base will and the money supply will .

The classical economists believed that if the quantity of money doubled