Question 1

-In the above figure, suppose that the economy has moved from point D to point B. According to the monetarist theory of the business cycle, what could have caused this movement?

Accepted Answer

According to the monetarist theory of the business cycle, an increase in the growth rate of the quantity of money would lead to an expansion in economic activity, moving the economy from a lower point (D) to a higher point (B) on the business cycle diagram. This is because monetarists believe that changes in the money supply are the primary cause of economic fluctuations.

Question 2

In monetarist business cycle theory, increases in money growth temporarily ________ real GDP and ________ the price level.

Accepted Answer

According to monetarist business cycle theory, increases in money growth stimulate aggregate demand, causing an expansion in real GDP in the short run. This temporary increase in real GDP is accompanied by a rise in the price level because of the excess demand in the economy. Therefore, the correct answer is A, as increases in money growth temporarily increase real GDP and raise the price level.

Question 3

Using the monetarist model, place the following events in the order in which they occur in a business cycle.
I.Money wages fall and the SAS curve shifts rightward.
II.The Federal Reserve decreases the growth rate of the quantity of money.
III.The AD curve shifts leftward.

Accepted Answer

In the monetarist model, a decrease in the growth rate of the quantity of money by the Federal Reserve (II) leads to a leftward shift in the Aggregate Demand (AD) curve (III), which eventually results in falling money wages and a rightward shift in the Short-Run Aggregate Supply (SAS) curve (I).

Question 4

The new classical theory argues that the primary factor leading to business cycles are

Accepted Answer

The answer of The new classical theory argues that the...

Question 5

Which of the following is TRUE regarding the monetarist theory of the business cycle?
I.Monetarists assume that the quantity of money increases at a constant rate.
II.Fluctuations in interest rates cause business cycles.
III.Changes in the growth rate of the quantity of money affect aggregate demand.

Accepted Answer

The monetarist theory assumes that changes in the growth rate of the quantity of money affect aggregate demand, which is statement III. Statement I is incorrect as monetarists believe that the quantity of money should be determined by the needs of the economy rather than a constant growth rate. Statement II is also incorrect as monetarists do not believe that fluctuations in interest rates are the primary cause of business cycles.

Question 6

-In the above figure, suppose the economy starts at point A. The short-run response to a decrease in the growth rate of the quantity of money in the monetarist business cycle theory moves the economy to point

Accepted Answer

In the monetarist business cycle theory, a decrease in the growth rate of the quantity of money would lead to a decrease in aggregate demand. This would move the economy up along the short-run aggregate supply curve from point A to point C, indicating a decrease in the price level and output in the short run.

Question 7

Which of the following pieces of evidence is most consistent with the monetarist theory?

Accepted Answer

The monetarist theory asserts that changes in the quantity of money have a significant impact on economic activity, particularly inflation and real GDP. Therefore, the evidence that changes in real GDP and the quantity of money move closely together is most consistent with this theory.

Question 8

In monetarist business cycle theory, the factor leading to a business cycle is represented by changes in

Accepted Answer

According to monetarist business cycle theory, changes in the growth rate of the quantity of money are the main factor leading to business cycles. This theory emphasizes the role of monetary policy in stabilizing the economy and suggests that the central bank should manage the money supply to keep it growing at a steady rate. Variations in the money supply have a direct impact on prices, interest rates, and economic activity, which in turn affect the behavior of consumers and firms. Therefore, the quantity of money is seen as a key driver of the business cycle in this framework.

Question 9

The business cycle impulse in the new classical theory of the business cycle is

Accepted Answer

According to the new classical theory of the business cycle, the business cycle impulse is unexpected changes in aggregate demand. This theory emphasizes that fluctuations in economic activity are primarily driven by temporary disturbances to the economy such as changes in technology or sudden shifts in consumer preferences. As such, unexpected changes in demand are seen as the primary cause of business cycle fluctuations.

Question 10

In monetarist business cycle theory, decreasing the growth rate of the quantity of money ________ and increasing the growth rate of the quantity of money ________.

Accepted Answer

Monetarist business cycle theory, primarily associated with Milton Friedman, posits that changes in the money supply are the main drivers of economic cycles. Decreasing the growth rate of the quantity of money is believed to slow down economic activity, potentially leading to a recession, while increasing the growth rate of the money supply is thought to stimulate economic activity, leading to an expansion.

Question 11

-In the above figure, suppose that the economy has moved from point A to point C. According to the monetarist theory of the business cycle, what could have caused this movement?

Accepted Answer

The answer of 
-In the above figure, suppose that the...

Question 12

Suppose the growth rate of the quantity of money increased from 5 percent per year to 8 percent per year. According to the ________, this event would trigger a business cycle expansion.

Accepted Answer

The monetarist cycle model proposes that changes in the quantity of money have a direct and predictable effect on economic activity. Therefore, an increase in the growth rate of the quantity of money is likely to lead to an expansion of the business cycle, which is consistent with monetarist theory. The other options do not necessarily view changes in the quantity of money as the primary driver of business cycle fluctuations.

Question 13

The new classical cycle theory predicts that an unexpected increase in aggregate demand ________ create a business cycle and an expected increase in aggregate demand ________ create a business cycle.

Accepted Answer

According to new classical cycle theory, only unexpected changes in aggregate demand create business cycles. Expected changes do not have any impact on the business cycle. Therefore, an unexpected increase in aggregate demand will create a business cycle while an expected increase in aggregate demand will not create a business cycle.

Question 14

The monetarist theory of the business cycle regards ________ as the factor that leads to business cycles.

Accepted Answer

According to the monetarist theory, changes in the growth rate of the quantity of money lead to business cycles. Monetarists believe that changes in the money supply affect interest rates, which in turn affects investment decisions and aggregate demand. Therefore, unexpected increases in aggregate demand (A) and volatility in the demand for money (D) are not considered as primary factors that lead to business cycles, and while volatility in the interest rate (C) may play a role in the business cycle, it is ultimately caused by changes in the growth rate of money.

Question 15

What, according to the monetarist theory of the business cycle, leads to changes in real GDP?

Accepted Answer

According to the monetarist theory of the business cycle, changes in the growth rate of the quantity of money lead to changes in real GDP. This is because an increase in the quantity of money leads to an increase in aggregate demand, which can stimulate economic growth, while a decrease in the quantity of money can lead to a decrease in aggregate demand and economic contraction. Choices A, B, and D are not specific to the monetarist theory and may have different implications in other theories.

Question 16

-Using the above figure as a starting point, a recession in the monetarist model would begin with a

Accepted Answer

In the monetarist model, a recession would typically begin with a decrease in aggregate demand, represented by a leftward shift in the Aggregate Demand (AD) curve. This reflects a reduction in the overall demand for goods and services in the economy.

Question 17

-In the above figure, suppose the economy starts at point A. The short-run response to an increase in the growth rate of the quantity of money in the monetarist business cycle theory moves the economy to point

Accepted Answer

The answer of 
-In the above figure, suppose the economy...

Question 18

-In the above figure, the economy is initially at point A. According to the monetarists, which point best represents the consequence of a short-run response to a decrease in the growth rate of the quantity of money?

Accepted Answer

The answer of 
-In the above figure, the economy is...

Question 19

-In the above figure, suppose the economy starts at point A. The short-run response to an increase in the growth rate of the quantity of money in the monetarist business cycle theory is for the price level to ________ and real GDP to ________.

Accepted Answer

In the monetarist business cycle theory, an increase in the growth rate of the quantity of money leads to a short-run increase in both the price level and real GDP. This is because, in the short run, prices and wages are sticky, allowing for real effects on the economy from changes in the nominal money supply.

Question 20

The ________ cycle theory states that only unexpected fluctuations in aggregate demand are the main source of business cycles.

Accepted Answer

The new classical cycle theory, also known as the Real Business Cycle theory, states that the main source of business cycles is unexpected fluctuations in technology and productivity that lead to changes in aggregate supply, rather than just fluctuations in aggregate demand as in the traditional Keynesian theory.

Quiz 12: The Business Cycle, Inflation, and Deflation