Question 1

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 2

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

The equation of exchange is MV=PY, where M is the money supply, V is velocity, P is the price level, and Y is real GDP. Using this equation, we can see that a fall in the money supply from $2 trillion to $1 trillion will lead to a decrease in the overall level of spending in the economy. If we assume that velocity remains constant at 5, then real GDP must also decrease in order to balance the equation. Therefore, real GDP will decrease from $5 trillion to $2.5 trillion (option A is incorrect).

Option B is incorrect because a decrease in the money supply is likely to lead to a decrease in velocity, as people and businesses may be less willing to spend if they have fewer dollars in circulation.

Option D is incorrect because it combines elements of both A and B, which are both incorrect.

Therefore, the correct answer is C, which states that the decrease in the money supply leads to a decrease in the price level. This is consistent with the general relationship between the money supply and the price level, known as the quantity theory of money. If there are fewer dollars in circulation, then the value of each dollar will be higher, leading to a decrease in prices.

Question 3

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 4

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 5

The quantity theory of inflation indicates that the inflation rate equals

Accepted Answer

The quantity theory of inflation states that the inflation rate is determined by the growth rate of the money supply minus the growth rate of aggregate output. This relationship is expressed in the equation MV = PQ, where M is the money supply, V is the velocity of money (how quickly money circulates through the economy), P is the price level, and Q is the level of real output. If the money supply grows faster than the rate of output, there will be excess money chasing a limited supply of goods and services, leading to inflation. Therefore, choice A is the correct answer.

Question 6

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 7

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

Accepted Answer

Irving Fisher's view was a foundation for the quantity theory of money, which states that a change in the money supply has a proportional effect on the price level. The equation of exchange, MV = PQ, is a central equation of the quantity theory of money, where V represents the velocity of money. Fisher believed that velocity was fairly constant in the short run, allowing for a proportional relationship between money supply and price level.

Question 8

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, with constant velocity, the equation of exchange can be written as MV = PY, where M is the money supply, V is velocity, P is the price level, and Y is real output. Doubling the money supply (M) while holding velocity (V) constant would lead to a proportional increase in nominal output (PY) and hence nominal income. Therefore, nominal income would double.

Question 9

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 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 is based on the equation of exchange, 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. According to this theory, the demand for money is solely determined by the level of income, and interest rates have no effect on the demand for money. This is because people need a certain amount of money to carry out their transactions, and this amount is proportional to their income. Therefore, the demand for money is a stable and predictable function of the level of economic activity.

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 equation shows that the deficit (the difference between government spending and tax revenue) is equal to the change in the monetary base (the amount of currency in circulation and reserves held by banks) plus the change in government bonds outstanding. This equation is useful for understanding how the government finances its spending and how it affects the money supply in the economy. Choice A correctly shows this relationship.

Question 12

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 13

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 14

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 is MV=PY, where M is the money supply, V is velocity, P is the price level, and Y is real GDP. So, an increase in the money supply to $2 trillion will result in an increase in nominal GDP to $10 trillion (2 trillion * 5). Since real GDP is constant, this increase in nominal GDP will lead to an increase in the price level to 2 (10 trillion/5 trillion). Velocity is not affected by the increase in the money supply in this scenario.

Question 15

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

Accepted Answer

Empirical evidence supports the quantity theory of money in the long run, but in the short run, factors such as changes in aggregate demand and supply, expectations, and technological progress affect prices, making this theory less reliable.

Question 16

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, cutting the money supply by one-third should lead to a one-third decline in the price level in the long run. This is because the decrease in the money supply would cause a decrease in the demand for goods and services, leading to a decrease in their prices. There is no reason to expect a decline in real output based on this theory.

Question 17

The classical economists believed that if the quantity of money doubled

Accepted Answer

The classical economists believed in the quantity theory of money, which states that the quantity of money in an economy directly affects the price level. They believed that if the quantity of money in an economy doubled, prices would also double. This is because there would be twice as much money chasing the same amount of goods, resulting in an increase in demand for goods and services and thus higher prices.

Question 18

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 19

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 20

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.

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

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

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

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

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

The quantity theory of inflation indicates that the inflation rate equals

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

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

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

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.

________ 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

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.

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

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

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

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

The classical economists believed that if the quantity of money doubled

According to the quantity theory of money demand

Financing government spending with taxes

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 .