Question 1

Suppose the full-employment level of real GDP is increasing at a rate of 4% per period. If policymakers are committed to keeping the long-run inflation rate at 3% per period, then what is the targeted money growth rate, assuming constant velocity?
A) 7%
B) 4%
C) 1%
D) -1%

Accepted Answer

The formula for the quantity theory of money is MV = PY, where M is the money supply, V is the velocity of money, P is the price level, and Y is real GDP. Assuming constant velocity, we can write %ΔM + %ΔV = %ΔP + %ΔY.

Given that policymakers want to keep the long-run inflation rate at 3%, %ΔP = 3%. The full-employment level of real GDP is increasing at a rate of 4% per period, so %ΔY = 4%.

Substituting these values, we get %ΔM + %ΔV = 7%. Since policymakers want to keep %ΔV constant, they need to set %ΔM equal to 7%. Therefore, the targeted money growth rate is 7%.

Question 2

Which of the following statements is true? Economists generally agree that
A) the rate of inflation in the long run is determined primarily by growth in government spending.
B) factors other than money growth may influence the inflation rate from one year to the next, but they are not likely to cause sustained inflation.
C) the primary cause of inflation is increases in the money supply growth that exceed growth increases in aggregate demand.
D) the major causes of inflation are declining productivity coupled with excessive spending.

Accepted Answer

The answer of Which of the following statements is true?...

Question 3

In the equation of exchange, if velocity is stable,
A) %∆V = 0.
B) %∆V = 1.
C) %∆V is a positive constant value > 0.
D) %∆V = infinity.

Accepted Answer

If velocity is stable, there is no change in velocity, so the percentage change in velocity is zero (%∆V = 0).

Question 4

In the long run, monetary growth
A) can change the unemployment rate only at the cost of increased inflation.
B) can change the unemployment rate while holding the inflation rate constant.
C) can promote economic growth.
D) cannot affect the factors that determine the economy's unemployment rate.

Accepted Answer

The answer of In the long run, monetary growth
A) can...

Question 5

Which of the following determines the rate of inflation in the long run? 
I. the rate of money growth
II. changes in expectations about the price level
III. the rate of economic growth
IV. changes in government spending
A) I and II only
B) I and III only
C) I, II, and III only
D) I, II, III, and IV

Accepted Answer

In the long run, the rate of inflation is primarily determined by the rate of economic growth (III) and the rate of money growth (I). Changes in expectations about the price level (II) may affect inflation in the short run but do not have a sustained impact in the long run, and changes in government spending (IV) may have an impact on the demand for goods and services but are not a direct determinant of the rate of inflation.

Question 6

In the long run, unemployment will be at the natural rate. This implies that
A) there is a one-to-one relationship between unemployment and inflation and consequently, the long-run Phillips curve is vertical.
B) there is no relationship between unemployment and inflation and consequently, the long-run Phillips curve is vertical.
C) there is a positive relationship between unemployment and inflation and consequently, the long-run Phillips curve is upward-sloping.
D) there is a negative relationship between unemployment and inflation and consequently, the long-run Phillips curve is downward-sloping.

Accepted Answer

In the long run, unemployment will be at the natural rate which is the rate at which there is no cyclical unemployment, only frictional and structural. This implies that there is no relationship between unemployment and inflation as changes in unemployment due to cyclical factors do not affect prices in the long run. Therefore, the long-run Phillips curve is vertical.

Question 7

Suppose the full-employment level of real GDP is increasing at a rate of 3% per period and the money supply is growing at a 3% rate. Using the equation of exchange, what is the value of the long-run inflation rate, assuming constant velocity?
A) 6%
B) 3%
C) 1%
D) 0%

Accepted Answer

According to the equation of exchange, MV = PY, where M is the money supply, V is velocity, P is the price level, and Y is real GDP. Assuming constant velocity, we can rearrange the equation to solve for the inflation rate (P). Thus, P = (M/Y) - (V/Y). Since the full-employment level of real GDP is increasing at a rate of 3% per period and the money supply is growing at a 3% rate, the ratio of M/Y is constant at 1 (3% growth in both numerator and denominator). Therefore, the inflation rate is 0% (3%-3%).

Question 8

In the long run, sustained inflation is due to
A) a one-time increase in money growth.
B) a continuous increase in the money growth rate.
C) a continuous increase in aggregate demand.
D) the rising price of oil.

Accepted Answer

Sustained inflation refers to a situation where the general price level increases persistently over time. This can only happen if there is a continuous increase in the money growth rate, i.e., the rate at which the money supply is increasing over time. When there is a persistent increase in the money supply, the excess money creates excess demand for goods and services. This, in turn, leads to an increase in prices as producers and sellers can charge higher prices in response to the increased demand. Therefore, sustained inflation cannot be due to a one-time increase in money growth or the rising price of oil. While an increase in aggregate demand can contribute to inflation in the short run, it alone cannot sustain inflation over a longer period.

Question 9

In the long run, unemployment 
I. will be at the natural rate of unemployment.
II. is made up of structural and frictional unemployment.
III. could be made up of structural, frictional, and cyclical unemployment.
A) I, II, and III
B) I and III only
C) I and II only
D) I only

Accepted Answer

In the long run, the economy should reach the natural rate of unemployment, which includes structural and frictional unemployment. However, cyclical unemployment may also persist in the long run if the economy experiences recurring periods of economic downturns. Therefore, Choice C is the best answer.

Question 10

Which of the following predictions can be made using the growth rates associated with the equation of exchange, given that velocity is stable and that the economy moves to its potential output (Y_P) in the long run? A) If %∆M > %∆ Y_P , then %∆P > %∆M. B) If %∆M > %∆ Y_P , then %∆P > %∆ Y_P. C) If %∆M = %∆ Y_P , then %∆P = 0. D) If %∆M = %∆ Y_P , then %∆P < 0.

Accepted Answer

The answer of Which of the following predictions can be...

Question 11

Which of the following predictions can be made using the growth rates associated with the equation of exchange, given that velocity is stable and that the economy moves to its potential output (Y_P) in the long run? A) If the money supply grows at a faster rate than growth in Y_P, there will be inflation. B) If the money supply grows at a slower rate than growth in Y_P, there will be a decrease in the inflation rate. C) If the money supply grows at the same rate as growth in Y_P, the price level will fall and there will be deflation. D) If the money supply grows at the same rate as growth in Y_P, the price level will also increase at the same rate as growth in Y_P,.

Accepted Answer

The equation of exchange is MV=PQ, where M is the money supply, V is velocity, P is the price level, and Q is real output. Rearranging the equation, we get the growth rate of the money supply minus the growth rate of real output is equal to the growth rate of the price level minus the growth rate of velocity. In the long run, velocity is stable and the economy moves to its potential output (Y_P), implying that the growth rate of real output is equal to zero. Therefore, in the long run, the growth rate of the price level is equal to the growth rate of the money supply minus the growth rate of velocity. Since velocity is stable in the long run, if the money supply grows at a faster rate than growth in potential output, the growth rate of the money supply will exceed the growth rate of velocity, leading to an increase in the growth rate of the price level, i.e., inflation. Therefore, choice A is correct. Choices B, C, and D are incorrect because they do not reflect the implications of the equation of exchange and the assumptions made about velocity and potential output in the long run.

Question 12

Which of the following predictions can be made using the growth rates associated with the equation of exchange, given that velocity is stable and that the economy moves to its potential output (Y_P) in the long run? A) If %∆M = %∆ Y_P , then %∆P = %∆M. B) If %∆M > %∆ Y_P , then %∆P > 0. C) If %∆M > %∆ Y_P , then %∆P > %∆M. D) If %∆M = %∆ Y_P , then %∆P < 0.

Accepted Answer

According to the equation of exchange, %∆M + %∆V = %∆P + %∆Y_P. Since velocity is assumed to be stable and the economy moves to its potential output in the long run, %∆Y_P will be close to zero. Therefore, %∆P will be proportional to %∆M, and if %∆M > %∆Y_P, then %∆P will also be positive. This is because an increase in the money supply will lead to an increase in prices in the long run.

Question 13

Suppose the full-employment level of real GDP is increasing at a rate of 3% per period and the money supply is growing at a 4% rate. Using the equation of exchange, what is the value of the long-run inflation rate, assuming constant velocity?
A) 7%
B) 4%
C) 1%
D) -1%

Accepted Answer

The answer of Suppose the full-employment level of real GDP...

Question 14

Suppose that rising productivity increases potential output in each period by 4%. What kind of monetary policy would be needed to maintain a zero rate of inflation at full employment?
A) It should keep money supply constant.
B) It should increase money supply by 4% per period.
C) It should increase money supply by 4% in the first period and thereafter, hold money supply constant.
D) It should decrease money supply by 4% each period.

Accepted Answer

To maintain a zero rate of inflation at full employment, the money supply should increase at the same rate as potential output, which is 4% per period, to match the increase in productivity and avoid inflationary or deflationary pressures.

Question 15

Which of the following predictions can be made using the growth rates associated with the equation of exchange, given that velocity is stable and that the economy moves to its potential output (Y_P) in the long run? A) If the growth rate in Y_P exceeds the money growth rate, there will be inflation. B) If the money growth rate is less than the growth rate in Y_P, there will be deflation. C) If the money supply grows at the same rate as growth in Y_P, the price level will grow at a constant rate. D) If the money supply grows at the same rate as growth in Y_P, the price level will also increase at the same rate as growth in Y_P.

Accepted Answer

The answer of Which of the following predictions can be...

Question 16

Evidence suggests that all countries with very high
A) inflation rates also have very high money growth rates.
B) unemployment rates also have very high GDP growth rates.
C) GDP growth rates also have very high government budget deficits.
D) government budget deficits also have very high inflation rates.

Accepted Answer

High inflation rates are often associated with high money growth rates because when a country's central bank prints more money, it can lead to an increase in the money supply, which can cause inflation if it outpaces economic growth.

Question 17

Using the equation of exchange, the rate of money growth can be expressed as
A) %∆M * %∆V = (%∆P * %∆Y) ÷ %∆V
B) %∆M = (%∆P + %∆Y) ÷ %∆V
C) %∆M = %∆P + %∆Y -%∆V
D) M * V = P * Y

Accepted Answer

The answer of Using the equation of exchange, the rate...

Question 18

Using the equation of exchange, if velocity is stable in the long run, the inflation rate, (%∆P) Jcan be expressed as
A) %∆P = %∆M ÷ %∆Y
B) %∆P = %∆M + %∆Y
C) %∆P = %∆M *%∆Y
D) %∆P = %∆M - %∆Y

Accepted Answer

The equation of exchange is MV = PY. If velocity (V) is stable, then %∆M = %∆P + %∆Y. Rearranging gives %∆P = %∆M - %∆Y.

Question 19

In the long-run, only a change in the _______ is likely to affect the inflation rate associated Jwith a particular rate of growth in the money supply.
A) aggregate demand
B) short-run aggregate supply
C) rate of economic growth
D) expectations about the price level

Accepted Answer

The answer of In the long-run, only a change in...

Question 20

In general, economists believe that the Phillips curve is
A) downward sloping with a steeper slope in the long run than in the short run.
B) downward sloping with a steeper slope in the short run than in the long run.
C) downward sloping in the short run but vertical in the long run.
D) could be horizontal in the short run but always vertical in the long run.

Accepted Answer

According to the concept of the Phillips curve, there is an inverse relationship between unemployment and inflation in the short run. This relationship is represented by a downward-sloping curve. However, in the long run, this relationship disappears, and the Phillips curve becomes vertical or nearly vertical. This vertical long-run Phillips curve suggests that in the long run, changes in the rate of inflation do not affect the rate of unemployment. The vertical nature of the long-run Phillips curve is mainly due to changes in inflation expectations, productivity, and other supply-side factors that influence the natural rate of unemployment.

Quiz 16: Inflation and Unemployment

Suppose the full-employment level of real GDP is increasing at a rate of 4% per period. If policymakers are committed to keeping the long-run inflation rate at 3% per period, then what is the targeted money growth rate, assuming constant velocity?

Which of the following statements is true? Economists generally agree that

In the equation of exchange, if velocity is stable,

In the long run, monetary growth

Which of the following determines the rate of inflation in the long run? I. the rate of money growth II. changes in expectations about the price level III. the rate of economic growth IV. changes in government spending

In the long run, unemployment will be at the natural rate. This implies that

Suppose the full-employment level of real GDP is increasing at a rate of 3% per period and the money supply is growing at a 3% rate. Using the equation of exchange, what is the value of the long-run inflation rate, assuming constant velocity?

In the long run, sustained inflation is due to

In the long run, unemployment I. will be at the natural rate of unemployment. II. is made up of structural and frictional unemployment. III. could be made up of structural, frictional, and cyclical unemployment.

Which of the following predictions can be made using the growth rates associated with the equation of exchange, given that velocity is stable and that the economy moves to its potential output (YP) in the long run?

Which of the following predictions can be made using the growth rates associated with the equation of exchange, given that velocity is stable and that the economy moves to its potential output (YP) in the long run?

Which of the following predictions can be made using the growth rates associated with the equation of exchange, given that velocity is stable and that the economy moves to its potential output (YP) in the long run?

Suppose the full-employment level of real GDP is increasing at a rate of 3% per period and the money supply is growing at a 4% rate. Using the equation of exchange, what is the value of the long-run inflation rate, assuming constant velocity?

Suppose that rising productivity increases potential output in each period by 4%. What kind of monetary policy would be needed to maintain a zero rate of inflation at full employment?

Which of the following predictions can be made using the growth rates associated with the equation of exchange, given that velocity is stable and that the economy moves to its potential output (YP) in the long run?

Evidence suggests that all countries with very high

Using the equation of exchange, the rate of money growth can be expressed as

Using the equation of exchange, if velocity is stable in the long run, the inflation rate, (%∆P) Jcan be expressed as

In the long-run, only a change in the _______ is likely to affect the inflation rate associated Jwith a particular rate of growth in the money supply.

In general, economists believe that the Phillips curve is

Which of the following predictions can be made using the growth rates associated with the equation of exchange, given that velocity is stable and that the economy moves to its potential output (Y_P) in the long run?

Which of the following predictions can be made using the growth rates associated with the equation of exchange, given that velocity is stable and that the economy moves to its potential output (Y_P) in the long run?

Which of the following predictions can be made using the growth rates associated with the equation of exchange, given that velocity is stable and that the economy moves to its potential output (Y_P) in the long run?

Which of the following predictions can be made using the growth rates associated with the equation of exchange, given that velocity is stable and that the economy moves to its potential output (Y_P) in the long run?