Deck 26: An Aggregate Supply and Demand Perspective on Money and Economic Stability

Question 1

Keynesians argue that an exogenous decrease in investment is likely to lead to

A) an increase in interest rates.
B) an increase in saving.
C) a decrease in the money supply.
D) a decrease in output.

Answer 1

D

Question 2

Keynesians believe that

A) the link between money and aggregate demand is very strong.
B) interest rates will immediately respond to a change in investments.
C) fluctuations in the price level are a source of stability.
D) the interest rate will not necessarily respond to a drop in investments.

Answer 2

D

Question 3

If there is an exogenous increase in investment spending, Monetarists argue that there would be little or no effect on real output because the interest rate would __________, investment would __________, saving would __________, and consumption would __________.

A) decline; increase; increase; decrease
B) decline; increase; decrease; increase
C) rise; decrease; decrease; increase
D) rise; decrease; increase; decrease

Answer 3

D

Question 4

Monetarists assume that there is a powerful direct link between aggregate demand and

A) velocity.
B) real money balances.
C) wage rates.
D) interest rates.

Question 5

From the Keynesian perspective, an exogenous increase in investment is likely to lead to

A) a decrease in interest rates.
B) an increase in output.
C) an increase in the money supply.
D) a decrease in government spending.

Question 6

The Keynesians argue that even if the interest rate does __________ in response to a decrease in investment, there is __________ guarantee that spending will increase very much.

A) increase; no
B) increase; a
C) decrease; no
D) decrease; a

Question 7

If inflation becomes a serious problem, a Monetarist-oriented President is likely to favor a policy emphasizing

A) slower monetary growth.
B) lower interest rates.
C) higher taxes.
D) wage and price controls.

Question 8

Monetarists argue that an exogenous fall in investment spending leads to

A) declining real output.
B) declining money supply.
C) declining velocity.
D) declining interest rates.

Question 9

If there is an exogenous decrease in investment spending, Monetarists argue that there would be little or no effect on real output because the interest rate would __________, investment would __________, saving would __________, and consumption would __________.

A) decline; increase; increase; decrease
B) decline; increase; decrease; increase
C) rise; decrease; decrease; increase
D) rise; decrease; increase; increase

Question 10

From the Monetarist perspective, an autonomous downward shift in investment will

A) shift the aggregate demand curve to the left.
B) shift the aggregate demand curve to the right.
C) have little effect on the aggregate demand curve.
D) cause a downward shift in the consumption function.

Question 11

Keynesians argue that the stabilizing effects of a fall in investment and the resulting decline in the price level assumed by the monetarists

A) will not happen because the price level will actually rise.
B) will happen.
C) is not likely to happen because the price level rarely ever falls.
D) may or may not happen depending on what happens to interest rates.

Question 12

Monetarists argue that an exogenous increase in investment spending is likely to be offset by a decrease in

A) the money supply.
B) interest rates.
C) government spending.
D) consumption.

Question 13

A relatively steep aggregate demand curve indicates that

A) velocity is relatively constant.
B) the economy is near full employment.
C) inflation is relatively high.
D) spending is insensitive to changes in the price level.

Question 14

A President who favors the use of government spending and taxes as tools to offset instability in the economy is likely to have advisers who are oriented toward

A) Keynesian economics.
B) Monetarist economics.
C) rational expectations.
D) the policies advocated by Milton Friedman.

Question 15

Keynesians assume that there is a powerful direct link between aggregate demand and

A) velocity.
B) real money balances.
C) exogenous investment spending.
D) interest rates.

Question 16

In the Keynesian system a drop in investment __________ cause the interest rate to __________.

A) will; fall
B) will; rise
C) does not; rise
D) does not necessarily; fall

Question 17

According to the Monetarists a decrease in investment spending initially __________ unemployment so that the price level __________. The resulting __________ in the real money supply __________ spending.

A) increases; rises; increase; decreases
B) increases; falls; increase; increases
C) increases; falls; increase; decreases
D) decreases; rises; increase; increases

Question 18

__________ argue that any exogenous decrease in investment spending would be countered automatically by either increased consumption or interest-sensitive investment spending.

A) Monetarists
B) Keynesians
C) Classical economists
D) None of the above.

Question 19

According to the Monetarists an increase in investment spending initially __________ unemployment so that the price level __________. The resulting __________ in the real money supply __________ spending.

A) increases; rises; increase; decreases
B) increases; falls; increase; increases
C) decreases; falls; decrease; increases
D) decreases; rises; decrease; decreases

Question 20

A relatively flat aggregate demand curve indicates that

A) velocity is relatively constant.
B) the economy is near full employment.
C) inflation is relatively low.
D) spending is sensitive to changes in the price level.

Question 21

In the Monetarist view, the aggregate demand curve will be unstable when __________ is __________.

A) exogenous investment; stable
B) the money supply; stable
C) exogenous investment; varies
D) money supply; varies

Question 22

The impact of monetary policy on the exchange rate is emphasized by

A) supply-side economists.
B) Monetarists.
C) Keynesians.
D) rational expectations theorists.

Question 23

A relatively steep aggregate demand curve indicates that

A) velocity is relatively constant.
B) the economy is near full employment.
C) inflation is relatively high.
D) spending is sensitive to changes in the price level.

Question 24

The assumption that people may choose to hold excess money balances when there is an increase in the money supply is emphasized by

A) supply-side economists.
B) Monetarists.
C) Keynesians.
D) rational expectations theorists.

Question 25

When the aggregate demand curve shifts to the left, real GDP falls unless the aggregate supply curve is

A) horizontal.
B) upward-sloping.
C) vertical.
D) upward-sloping or vertical.

Question 26

When the aggregate demand curve shifts to the left against a vertical aggregate supply curve, the price level should __________ unless, as __________ argue, prices may have rigidities.

A) fall; Keynesians
B) fall; Monetarists
C) rise; Keynesians
D) rise; Monetarists

Question 27

Keynesian picture the aggregate demand curve as rather __________, partly because interest rates may be __________ to changes in the real money supply.

A) flat; highly responsive
B) flat; quite unresponsive
C) steep; highly responsive
D) steep; quite unresponsive

Question 28

Suppose a shift of aggregate demand pushes the economy "southwest" away from full employment in the aggregate demand and supply diagram. Monetarists would recommend returning to full employment by

A) raising the money supply.
B) lowering the money supply.
C) waiting for the price level to rise.
D) waiting for the price level to fall.

Question 29

Monetarists have argued that since velocity __________, this shows that shifts to the investment demand function must __________.

A) is rather stable; cause the private economy to be unstable
B) is rather stable; be offset by interest rate changes
C) moves counter-cyclically; cause the private economy to be unstable
D) moves counter-cyclically; be offset by interest rate changes

Question 30

In the Keynesian model, a short-run increase in investment spending will shift the aggregate

A) supply curve to the left.
B) supply curve to the right.
C) demand curve to the left.
D) demand curve to the right.

Question 31

According to the Monetarists, the money supply is a major factor determining

A) aggregate supply.
B) aggregate demand.
C) velocity.
D) real wages.

Question 32

The impact of monetary policy on the cost of capital is emphasized by

A) supply-side economists.
B) Monetarists.
C) Keynesians.
D) rational expectations theorists.

Question 33

From a Keynesian perspective, a short-run decrease in investment spending will shift the aggregate

A) supply curve to the left.
B) supply curve to the right.
C) demand curve to the left.
D) demand curve to the right.

Question 34

Which of the following is a key assumption leading to the Monetarist view that government deficits crowd out private investment?

A) Money demand is sensitive to the interest rate.
B) The aggregate supply curve is horizontal.
C) Technology is fixed.
D) Investment is sensitive to the interest rate.

Question 35

Monetarists tend to think that the aggregate demand curve is

A) stable.
B) vertical.
C) horizontal.
D) sensitive to changes in investment spending.

Question 36

From the Monetarist perspective, the aggregate supply curve is

A) vertical.
B) horizontal.
C) sensitive to changes in the money supply.
D) sensitive to changes in consumption.

Question 37

To Keynesians, a vertical aggregate supply curve

A) is nonsensical.
B) holds in the short run but not the long run.
C) holds in the long run but not the short run.
D) will only be encountered at the full-capacity output of the economy.

Question 38

A Keynesian forecast of economic growth next year is likely to focus on

A) money demand.
B) money supply.
C) velocity of money.
D) investment spending plans.

Question 39

According to Monetarists, a direct substitution between cash balances and real goods results from a change in

A) investment spending.
B) consumption spending.
C) government spending.
D) the money supply.

Question 40

A Classical aggregate supply curve is

A) vertical.
B) upward-sloping.
C) horizontal.
D) downward-sloping.

Question 41

The "wealth effect" of lower interest rates is that bond prices are __________ so people respond to this by __________ consumption and thus __________ aggregate demand.

A) increased; increasing; increasing
B) increased; increasing; decreasing
C) lowered; increasing; increasing
D) lowered; increasing; decreasing

Question 42

A tradeoff between inflation and unemployment is shown directly by the __________ curve.

A) Fisher
B) Phillips
C) Friedman
D) aggregate demand

Question 43

A vertical Phillips Curve is consistent with

A) a constant price level.
B) constant velocity.
C) an upward sloping aggregate supply curve.
D) a vertical aggregate supply curve.

Question 44

The assumption that wages change more slowly than prices implies that the

A) aggregate demand curve has a positive slope.
B) aggregate demand curve has a negative slope.
C) Phillips Curve has a negative slope.
D) Phillips Curve has a positive slope.

Question 45

Complete crowding out implies that a government deficit financed by selling bonds to the nonblank public will

A) have no effect on aggregate demand.
B) reduce aggregate demand.
C) increase aggregate demand.
D) reduce aggregate demand in the short run but cause demand to increase in the long run.

Question 46

An inflation forecast developed in a Monetarist framework is likely to focus on

A) Federal Reserve policy.
B) interest rate movements.
C) household and business spending decisions.
D) the velocity of money.

Question 47

The relationship between unemployment and inflation is

A) nonexistent.
B) positive.
C) negative.
D) None of the above.

Question 48

The Phillips Curve implies a trade-off between

A) investment and saving.
B) inflation and unemployment.
C) employment and income.
D) investment and government deficits.

Question 49

Monetarists argue that government deficits financed by monetary expansion cause(s)

A) velocity to increase.
B) aggregate demand to increase.
C) aggregate demand to decrease.
D) no change in aggregate demand or aggregate supply.

Question 50

A Phillips Curve that has a negative slope is consistent with

A) a constant price level.
B) constant velocity.
C) an upward sloping aggregate supply curve.
D) a vertical aggregate supply curve.

Question 51

What method of financing government spending leads to the least crowding-out?

A) Money creation
B) Taxation
C) Selling bonds to the public
D) Selling government assets, like national parks

Question 52

In the Monetarists' view, a one-time increase in the price level results from a(n)

A) technological improvement.
B) increase in the labor force.
C) supply shock.
D) interest-rate increase.

Question 53

The Monetarists argue that in the long run, the Phillips Curve is vertical because

A) wages and prices are flexible.
B) money demand is unstable.
C) investment is unstable.
D) wages change more slowly than the price level.

Question 54

Partial crowding out implies that a government deficit financed by selling bonds to the non-bank public will

A) have no effect on aggregate demand.
B) reduce aggregate demand.
C) increase aggregate demand.
D) reduce aggregate demand in the short run but cause demand to increase in the long run.

Question 55

"Crowding out" occurs as an expansionary fiscal policy __________ interest rates, thus __________ investment spending.

A) raises; increasing
B) raises; decreasing
C) lowers; increasing
D) lowers; decreasing

Question 56

The essence of the monetarists view on crowding out is that higher government spending which is not financed by new money creation simply

A) reduces private spending by an equal amount.
B) decreases the demand for money.
C) increases investment.
D) increases aggregate demand in the in the long run.

Question 57

Which of the following assumptions indicates that there is no trade-off between inflation and unemployment?

A) A vertical aggregate demand curve
B) A vertical Phillips Curve
C) Constant velocity
D) Constant money supply growth rate

Question 58

An inflation forecast developed in a Keynesian framework is likely to focus on

A) Federal Reserve policy.
B) international gold movements.
C) household and business spending decisions.
D) the velocity of money.

Question 59

From the Keynesians' perspective, a short-run Phillips Curve exists because

A) wages and prices are perfectly flexible.
B) money demand is unstable.
C) investment is unstable.
D) wages change more slowly than the price level.

Question 60

The assumption that wages change more slowly than prices provides an argument for the

A) aggregate demand curve having a positive slope.
B) aggregate demand curve having a negative slope.
C) aggregate supply having a negative slope.
D) aggregate supply having a positive slope.

Question 61

Monetarists blame rising government deficits for rising inflation

A) because deficits shift aggregate demand to the right.
B) so long as the aggregate supply curve is vertical.
C) when financing these deficits involves money creation.
D) because the deficits increase the demand for money and thus interest rates.

Question 62

A decrease in inflationary expectations __________ interest rate.

A) raises the natural
B) raises the nominal
C) lowers the natural
D) lowers the nominal

Question 63

A positive relationship exists between monetary growth and interest rates when the

A) aggregate supply curve is horizontal.
B) aggregate demand curve is horizontal.
C) price level is fixed.
D) income effect offsets the liquidity effect.

Question 64

Abandonment of continual active discretionary counter-cyclical policies is advocated by

A) Keynesians.
B) Monetarists.
C) both Keynesians and Monetarists.
D) neither Keynesians nor Monetarists.

Question 65

If policymakers are expected to increase the money supply, then Monetarists argue that bond demand and thus prices will __________. When it occurs, the actual increase in the money supply will have no further effect on bond prices and thus the anticipated higher inflation rate will cause interest rates to __________.

A) increase; increase
B) increase; decrease
C) decrease; increase
D) decrease; decrease

Question 66

The income effect implies that there is a positive relationship between

A) income and the unemployment rate.
B) the unemployment rate and the inflation rate.
C) aggregate supply and aggregate demand.
D) monetary growth and interest rates.

Question 67

Monetarists contend that an expansionary monetary policy will lead to a rise in the interest rate because __________ and the __________ effect will raise interest rates by more than the initial __________ effect lowers it.

A) inflationary expectations; income; liquidity
B) inflationary expectations; liquidity; income
C) deflationary expectations; income; liquidity
D) deflationary expectations; liquidity; income

Question 68

Monetarists view the use of monetary policy to fine-tune the economy as

A) unnecessary because the private sector is inherently stable.
B) always inflationary.
C) less predictable than fiscal policy.
D) impossible because the Fed does not have the tools to control the money supply.

Question 69

Monetarists consider timing variations in the relationship between money supply changes and income changes to be

A) a fundamental problem of counter-cyclical monetary policy.
B) inconsequential relative to the problem of instability in the velocity of money.
C) a fundamental long-run problem but not a significant problem in the short run.
D) offset by predictable changes in the money multiplier.

Question 70

Monetarists believe that the type of monetary policy that would lead to greater economic stability is

A) a money supply rule.
B) a constant money supply.
C) a counter-cyclical monetary policy.
D) a pro-cyclical monetary policy.

Question 71

If policymakers are expected to increase the money supply, Monetarists argue that there is __________ effect. There is __________ effect that raises prices when the money supply actually increases.

A) a small liquidity; an income
B) no; an income
C) a small income; a liquidity
D) no; a liquidity

Question 72

A vertical aggregate supply curve implies __________ Phillips curve.

A) an upward-sloping
B) a downward-sloping
C) a vertical
D) a horizontal

Question 73

Expansions of aggregate demand cause the economy to move along what is essentially a vertical aggregate supply curve when

A) wage increases catch up to inflation.
B) higher prices can reduce interest rates no further.
C) money supply growth rises to equal the rate of aggregate demand expansion.
D) from a recession level of output, full employment is reached.

Question 74

An increase in inflationary expectations __________ interest rate.

A) raises the natural
B) raises the nominal
C) lowers the natural
D) lowers the nominal

Question 75

An increase in the money supply will immediately __________ the __________ interest rate, according to the "liquidity effect."

A) raise; natural
B) raise; nominal
C) lower; natural
D) lower; nominal

Question 76

A decrease in the money supply will immediately __________ the __________ interest rate, according to the "liquidity effect."

A) raise; natural
B) raise; nominal
C) lower; natural
D) lower; nominal

Question 77

Keynesians believe that to help ensure full employment production, we should use

A) both counter-cyclical monetary and fiscal policy.
B) a money supply rule and counter-cyclical fiscal policy.
C) counter-cyclical fiscal policy only.
D) counter-cyclical monetary policy only.