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...

Question 2

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 circulation is proportional to the level of prices. Therefore, if the quantity of money doubled, prices would also double, assuming that the velocity of money (the rate at which money is spent) and real output remain constant.

Question 3

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 that velocity is fairly constant in the short run is a fundamental assumption underlying the quantity theory of money, which sees changes in the money supply as the primary driver of changes in prices. The equation of exchange, MV = PQ (where M is the money supply, V is velocity, P is the price level, and Q is real output), is a basic formulation of the quantity theory.

Question 4

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 relative to the growth rate of aggregate output (real GDP). Therefore, the correct formula for the inflation rate is the growth rate of the money supply minus the growth rate of aggregate output, as given in option A. Options B, C, and D are incorrect because they involve adding or subtracting the levels of the money supply and output, rather than their growth rates.

Question 5

________ 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 posits that the demand for money is solely a function of income, and that interest rates have no impact on the demand for money. Keynes's theory, on the other hand, asserts that the demand for money is a combination of transactions demand (for goods and services) and precautionary demand (for unforeseen events). Friedman's theory emphasizes the relationship between money supply and inflation, and how changes in monetary policy can affect real economic activity. Tobin's theory, also known as the portfolio theory of money demand, accounts for the opportunity costs of holding money (i.e. foregone investment returns).

Question 6

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 not necessarily in the short run. In the short run, other factors such as changes in supply or demand shocks can affect inflation. However, over the long run, an increase in the supply of money will lead to a proportional increase in the price level.

Question 7

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 8

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 9

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

In 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.

Initially, MV=PY, or 1 trillion x 5 = 1 x 5 trillion

If the money supply increases to $2 trillion, and velocity remains at 5, then MV=PY becomes 2 trillion x 5 = P x 5 trillion. Solving for P, we get P = 2, meaning the price level has doubled.

Real GDP cannot increase without an increase in factors of production or technological improvements, so A is incorrect.

Velocity is not affected by changes in the money supply, so B and D are incorrect.

Question 10

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 quantity of money in circulation determines the level of prices. Therefore, if the money supply is cut by one-third, we can expect a corresponding decrease in the price level by one-third in the long run. While there may be some short-term effects on output, the quantity theory of money does not predict a direct relationship between the money supply and real output in the long run.

Question 11

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 quantity theory of money states that MV=PY, where M is the money supply, V is velocity, P is the price level, and Y is real GDP. If M decreases from $2 trillion to $1 trillion and velocity remains constant at 5, then PY must also decrease. Since Y is fixed at $5 trillion, P must decrease from 2 to 1 in order to bring PY down. Therefore, option C is correct. Options A and B are incorrect because a decrease in the money supply will not directly affect real GDP or velocity. Option D is incorrect because the decrease in the money supply will not cause a decrease in velocity.

Question 12

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 13

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 14

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 15

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 16

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 17

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, if velocity is constant in the short run, then the equation of exchange can be simplified to MV = PY, where M is the money supply, V is velocity, P is the price level, and Y is real output. When the money supply doubles, assuming velocity is constant and there is no change in real output, then nominal income (PY) must also double. Therefore, the correct answer is D: nominal income doubles.

Question 18

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

The classical economists believed that velocity could be treated as constant in the short run. They believed that money supply determined nominal income, and as long as velocity remained constant, changes in the money supply would have a proportional effect on nominal income.

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

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 expresses that the government's deficit (DEFICIT) is equal to the difference between government spending (G) and tax revenues (T), which can be financed by an increase in the base money supply (ΔMB) and/or an increase in government bonds (ΔBONDS). Therefore, choice A correctly represents the government budget constraint.

Quiz 22: 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

The classical economists believed that if the quantity of money doubled,

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

The quantity theory of inflation indicates that the inflation rate equals

________ 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.

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

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

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

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

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

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 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 .

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

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.

According to the quantity theory of money demand,

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.

Financing government spending with taxes

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