Question 1

The Monetarist model differs from the classical model in that
A)changes in aggregate demand,not aggregate supply,drive changes in output.
B)changes in the money supply drive changes in inflation inflation.
C)changes in aggregate supply,not aggregate demand,drive changes in ouput.
D)money demand is not always stable.
E)none of the above.

Accepted Answer

The Monetarist model emphasizes that changes in aggregate demand, particularly through changes in the money supply, drive changes in output, contrasting with the classical model which focuses on aggregate supply.

Question 2

Friedman and others view changes in velocity as the result of changes in
A)income.
B)who is the chairman of the Federal Reserve.
C)interest rates.
D)inflation.

Accepted Answer

The answer of Friedman and others view changes in velocity...

Question 3

Monetarists emphasize
A)crowding-out but not the liquidity trap.
B)crowding-out and the liquidity trap.
C)the liquidity trap but not crowding-out.
D)neither crowding-out nor the liquidity trap.

Accepted Answer

Monetarists emphasize crowding-out, which is the idea that increased government borrowing can lead to higher interest rates and reduced investment spending by the private sector. They generally do not focus on the liquidity trap, which is a situation where monetary policy becomes ineffective because the nominal interest rate is at or near zero.

Question 4

According to the monetarist view,the
A)IS schedule is quite flat; hence,reflecting a high interest elasticity of aggregate demand.
B)IS schedule is quite steep; hence,reflecting a high interest elasticity of aggregate demand.
C)LM schedule is quite flat; hence,reflecting a high interest elasticity of money demand.
D)IS schedule is almost vertical; hence,reflecting a very low interest elasticity of money demand.

Accepted Answer

The monetarist view holds that the IS schedule is quite flat, reflecting a high interest elasticity of aggregate demand. This is because monetarists believe that changes in the interest rate have a significant impact on aggregate demand, as they affect the cost of borrowing and investment.

Question 5

Monetarists assume that people form their expectations only by
A)looking forwards
B)looking backwards.
C)using all available information.
D)using publicly available forecasts.

Accepted Answer

Monetarists assume that people form their expectations by looking backwards, meaning they base their expectations on past experiences and trends rather than current or future information. This assumption is linked to the idea that changes in money supply and price levels will only affect the economy in the long run, rather than immediately.

Question 6

According to the monetarists,the ratio of nominal GDP to the money stock should be
A)highly unstable in short run and in long run.
B)unstable only during recession.
C)unstable only in the long run.
D)quite stable in the short run and the long run.
E)unstable only if the LM curve shifts.

Accepted Answer

Monetarists believe in the Quantity Theory of Money, which states that in the long run, changes in the money supply will translate proportionally into changes in the price level and nominal GDP. Therefore, the ratio of nominal GDP to the money stock should remain relatively stable in the long run. In the short run, there may be some fluctuations due to changes in velocity or shifts in the LM curve, but overall, the ratio should still be relatively stable.

Question 7

Since the 1980s,
A)monetarism reached its peak.
B)the influence of the monetarists and Keynesians both eroded.
C)monetarism re-established itself with a stable money/income relationship.
D)monetarism declined in influence as Keyesian thought overtook it in influence.

Accepted Answer

Beginning in the 1980s, the influence of both monetarists and Keynesians began to erode as new economic theories emerged. This period saw the rise of supply-side economics, which emphasized reducing government regulation and taxation to stimulate economic growth, and the development of new classical economics, which challenged many traditional assumptions about macroeconomic policy. Therefore, neither monetarism nor Keynesianism re-established themselves as dominant economic theories during this period.

Question 8

If the Fed followed through on plans to be more open to and more quickly provide the public with information about monetary policy,then we would expect to see
A)the impact of the money supply on output would get stronger.
B)the Fed would not have any power over output in the future.
C)the impact of the money supply on output would get weaker.
D)information does not affect output.

Accepted Answer

If the Fed provides more information about monetary policy, it would lead to greater transparency and less uncertainty, which could potentially weaken the impact of the money supply on output. This is because markets and consumers would be able to better anticipate and adjust to changes in monetary policy, reducing the shock of changes in the money supply. However, it is important to note that this is just a potential effect and other factors could come into play as well.

Question 9

The experience of the United States and other industrialized countries in the 1930s contradicts the classical view of the labor market where the money wage adjusts quickly to maintain full employment.On this issue
A)the Keynesians agree but the monetarists disagree.
B)the monetarists agree but the Keynesians do not agree.
C)both the Keynesians and monetarists are in agreement.
D)neither the Keynesians nor the monetarists agree.

Accepted Answer

The answer of The experience of the United States and...

Question 10

Monetarists believe in all of the following except
A)steady growth in inflation will yield stable output.
B)steady growth in the money supply will yield stable output.
C)fluctuations in the money supply are responsible for business cycles.
D)the Fed should not be involved in trying to stabilize the economy.

Accepted Answer

Monetarists, such as Milton Friedman, argue that a steady growth in the money supply is crucial for stable output (B), believe that fluctuations in the money supply are a major cause of business cycles (C), and often argue that the Federal Reserve's attempts to stabilize the economy can be counterproductive (D). However, they do not typically argue that steady growth in inflation will yield stable output (A), as they focus more on the money supply than on inflation per se.

Question 11

Early Keynesians concluded that the quantity of money was not important because they assumed
A)low interest elasticity of money demand and high interest elasticity of the demand for output.
B)high interest elasticity of money demand and low interest elasticity of the demand for output.
C)high interest elasticity of money demand and high interest elasticity of the demand for output.
D)both low interest elasticity of money demand and of the demand for output.

Accepted Answer

Early Keynesians believed that the demand for money was highly interest-elastic, meaning that changes in the interest rate would have a large effect on the quantity of money demanded. However, they also assumed that the demand for output was relatively inelastic, meaning that changes in the interest rate would not have a significant effect on the level of output produced. Therefore, they believed that changes in the quantity of money would primarily affect asset prices (such as bond yields) rather than output levels.

Question 12

According to the Monetarists,the real effect of monetary policy on output is
A)long-lasting and unpredictable.
B)predictable and beneficial.
C)nonexistent in the short run.
D)always less than fiscal policy

Accepted Answer

Monetarists, led by Milton Friedman, argue that the real effect of monetary policy on output is long-lasting but unpredictable due to the complex ways in which changes in the money supply can affect the economy over time. They believe in the long-term influence of monetary policy on inflation and economic output, but also acknowledge the difficulty in predicting the exact outcomes due to the variable lags and the complexity of economic interactions.

Question 13

According to the second monetarist proposition,which of the following factors do not determine the level of real output in the long run?
A)The stock of capital goods
B)The size of the labor force
C)The quality of the labor force
D)The state of technology
E)The quantity of money

Accepted Answer

The second monetarist proposition states that in the long run, the level of real output is determined by factors such as the stock of capital goods, the size and quality of the labor force, the state of technology, and other factors that are not related to the quantity of money. Therefore, the quantity of money does not determine the level of real output in the long run.

Question 14

Both the classical and monetarist models assume all of the following except
A)perfectly flexible prices.
B)perfectly flexible wages.
C)perfect information.
D)vertical aggregate supply curve in the long-run.

Accepted Answer

Perfect information is not assumed in either the classical or monetarist models.

Question 15

Which of the following is correct? Whenever the monetary authority pegs the interest rate,
A)it must be ready to adjust the interest rate on demand.
B)the monetary authority must exchange money for bonds on demand.
C)it has control of the quantity of money.
D)None of the above

Accepted Answer

When the monetary authority pegs the interest rate, it commits to buying and selling bonds at the pegged rate, effectively exchanging money for bonds on demand to maintain that rate. This action influences the money supply indirectly through the bond market.

Question 16

If the central bank targets interest rates,then the LM curve is
A)vertical.
B)horizontal.
C)upward sloping.
D)downward sloping.

Accepted Answer

When the central bank targets interest rates, it adjusts the money supply as needed to maintain its target rate. This means the money supply is perfectly elastic at the targeted interest rate, resulting in a horizontal LM curve.

Question 17

The monetarist explanations of the Great Depression focus on
A)falls in the LM curve and aggregate demand.
B)falls in aggregate supply.
C)fall in the IS curve and aggregate demand..
D)falls in expectations and the expected price level.

Accepted Answer

Monetarists argue that the Great Depression was largely due to a contraction in the money supply, which caused a leftward shift in the LM curve and a decrease in aggregate demand.

Question 18

How can the Cambridge equation be restated according to Friedman's money demand theory? A)M^d = k(r_B,r_E,r_D)Py B)M^d = k/Py(r_B,r_E,r_D) C)M^d = Py/k(r_B,r_E,r_D) D)M^d = (r_B,r_E,r_D)Py/k

Accepted Answer

Friedman's restatement of the Cambridge equation incorporates the demand for money as a function of various factors, represented symbolically in the equation, and equates it to the nominal money supply (MS) times the velocity of money (V), which is inversely related to k, a constant representing the fraction of income people wish to hold as money, times the price level (P) and real income (y).

Question 19

Targeting money growth will lead to stable output growth only if
A)money demand and velocity change proportionally with output.
B)fiscal policy remains unchanged.
C)money demand and velocity are stable.
D)the IS curve is steep.

Accepted Answer

If money demand and velocity are stable, targeting money growth can lead to stable output growth as well. Factors such as fiscal policy changes and the steepness of the IS curve can impact the relationship between money growth and output growth. However, if money demand and velocity are unstable, targeting money growth may not lead to stable output growth.

Question 20

According to monetarists,
A)businesses and households are the primary source of instability in the economy.
B)the Federal Reserve causes instability in the economy primarily by allowing instability in the money demand that determines the level of economic activity.
C)the government can stabilize the economy by interfering with the normal misadjustment mechanisms in the private sector.
D)All of the above
E)None of the above

Accepted Answer

Monetarists, such as Milton Friedman, argue that the primary source of economic instability is erratic monetary policy, not the factors listed in options A, B, and C. They believe in the stability of private sector mechanisms and criticize excessive government or Federal Reserve intervention.

Quiz 9: The Monetarist Counterrevolution

The Monetarist model differs from the classical model in that

Friedman and others view changes in velocity as the result of changes in

Monetarists emphasize

According to the monetarist view,the

Monetarists assume that people form their expectations only by

According to the monetarists,the ratio of nominal GDP to the money stock should be

Since the 1980s,

If the Fed followed through on plans to be more open to and more quickly provide the public with information about monetary policy,then we would expect to see

The experience of the United States and other industrialized countries in the 1930s contradicts the classical view of the labor market where the money wage adjusts quickly to maintain full employment.On this issue

Monetarists believe in all of the following except

Early Keynesians concluded that the quantity of money was not important because they assumed

According to the Monetarists,the real effect of monetary policy on output is

According to the second monetarist proposition,which of the following factors do not determine the level of real output in the long run?

Both the classical and monetarist models assume all of the following except

Which of the following is correct? Whenever the monetary authority pegs the interest rate,

If the central bank targets interest rates,then the LM curve is

The monetarist explanations of the Great Depression focus on

How can the Cambridge equation be restated according to Friedman's money demand theory?

Targeting money growth will lead to stable output growth only if

According to monetarists,