Question 1

If nominal GDP is $848 billion and the velocity of money is 4, then the
A)money supply is $170 billion.
B)money supply is $212 billion.
C)consumer price index is 340.
D)average level of prices is $170 billion.

Accepted Answer

The equation for calculating money supply is MV=PQ, where M is the money supply, V is the velocity of money, P is the price level, and Q is the quantity of goods and services produced. Rearranging the equation, we get M=PQ/V. Plugging in the given values, M=(848 billion)/4 = $212 billion. Therefore, choice B is correct. The other choices cannot be determined from the given information.

Question 2

If money supply is $800 billion and nominal GDP is $2 trillion, then the average number of times that money is spent and changes hands is
A)2.5 times per year.
B)2 times per year.
C)1.6 times per year.
D)16 times per year.

Accepted Answer

The answer of If money supply is $800 billion and...

Question 3

Monetarists would argue that the severe recession of 2007-2009 was primarily caused by
A)adverse aggregate-supply shocks causing tremendous unemployment.
B)wide swings in investment expenditures driving erratic fluctuations in aggregate demand.
C)excessive money supply creating a bubble in some sectors of the economy.
D)too much deregulation of the financial sector in previous years.

Accepted Answer

Monetarists believe that fluctuations in the money supply are the main cause of economic instability. They would argue that excessive money supply led to a bubble, particularly in the housing sector, which contributed to the recession.

Question 4

According to real-business-cycle theory, recessions are caused by
A)deviations of aggregate supply from long-term growth trends.
B)monetary factors affecting aggregate demand.
C)people choosing leisure rather than work.
D)a decline in the supply of money.

Accepted Answer

Real-business-cycle theory suggests that recessions are caused by negative supply shocks that cause a decline in aggregate supply, which results in a decline in output and employment. These negative shocks may be caused by factors such as natural disasters, technological changes, or changes in government regulations. In other words, recessions are seen as a natural part of the business cycle caused by external factors that affect the productive capacity of the economy, rather than by monetary factors affecting aggregate demand or individual choices about work and leisure.

Question 5

If the economy diverges from its full-employment output, new classical economics would suggest that
A)a change in the velocity of money would be all that is needed to return it to its full-employment output.
B)an improvement in insider-outsider relationships is all that is needed to return it to its full-employment output.
C)an efficiency wage in the economy would return it to its full-employment output.
D)internal mechanisms within the economy would automatically return it to its full-employment output.

Accepted Answer

New classical economics suggests that the economy has self-correcting mechanisms, such as flexible prices and wages, which will automatically adjust to bring the economy back to its full-employment output without the need for external intervention.

Question 6

If the velocity of money remains unchanged and the economy is at full employment, then the equation of exchange predicts that a rise in the money supply will
A)increase prices.
B)increase interest rates.
C)increase real output.
D)decrease nominal GDP.

Accepted Answer

According to the equation of exchange, MV=PY, where M refers to money supply, V refers to velocity of money, P refers to price level and Y refers to real output. When both V and Y are constant, any increase in M will lead to an increase in P. Hence, a rise in money supply will lead to an increase in prices.

Question 7

In real-business-cycle theory, changes in the
A)demand for money respond to changes in the supply of money.
B)supply of money respond to changes in the demand for money.
C)demand for money respond to changes in efficiency wages.
D)supply of money respond to changes in coordination failures.

Accepted Answer

In real-business-cycle theory, the supply of money responds to changes in the demand for money.

Question 8

Assume that M is $200 billion and V is 6.If V increases by 15 percent, then, according to the monetarist equation, nominal GDP will have increased by
A)$140 billion.
B)$180 billion.
C)$220 billion.
D)$260 billion.

Accepted Answer

According to the monetarist equation, MV=PY. Since we are only changing V, we can solve for the new value of nominal GDP (PY) as follows: 
New V = 6 + 0.15(6) = 6.9 
New PY = M * New V = $200 billion * 6.9 = $1.38 trillion 
The increase in nominal GDP is therefore: 
New PY - Old PY = $1.38 trillion - $1.2 trillion = $180 billion.

Question 9

If households and firms cut back on spending because they expect other households and firms to do so, and this self-fulfilling prophecy causes a recession, then this would be an example of
A)insider-outsider relationships.
B)efficiency wage theory.
C)a coordination failure.
D)a price-level surprise.

Accepted Answer

A coordination failure occurs when economic agents fail to coordinate their actions, leading to suboptimal outcomes like a recession due to reduced spending based on expectations.

Question 10

The idea that business fluctuations are primarily caused by factors affecting aggregate supply rather than aggregate demand is a central tenet of
A)efficiency wage theory.
B)real-business-cycle theory.
C)mainstream economics.
D)monetarism.

Accepted Answer

Real-business-cycle theory emphasizes the role of supply-side factors, such as technological shocks and changes in government policy, in driving business fluctuations.

Question 11

If the amount of money in circulation is $8 billion and the value of total output is $40 billion in an economy, then the
A)velocity of money is 5.
B)money supply is $40 billion.
C)level of the price index is 320.
D)equilibrium level of GDP is $320 billion.

Accepted Answer

Velocity of money is calculated by dividing the value of total output by the amount of money in circulation. In this case, the velocity of money is 5 ($40 billion/$8 billion = 5). None of the other options can be determined with the given information.

Question 12

Mainstream economics views monetary policy as a
A)source of instability, similar to the view of monetarism.
B)stabilizing factor, similar to the view of monetarism.
C)source of instability, while monetarism views it as a stabilizing factor.
D)stabilizing factor, while monetarism views it as a source of instability.

Accepted Answer

Mainstream economics generally views monetary policy as a stabilizing factor, as it can be used to influence economic activity and promote stability. Monetarism, on the other hand, views monetary policy as a potential source of instability, as it can create inflationary pressures if the money supply is not carefully managed. Therefore, the best choice is D, as it accurately reflects the diverging views between mainstream economics and monetarism on the role and impact of monetary policy.

Question 13

In the mainstream view, the severe recession of 2007-2009 was caused by
A)an aggregate-supply shock, which caused the AS curve to shift left.
B)a financial crisis that caused a shrinkage in investment and consumption spending, thereby reducing aggregate demand.
C)monetary factors, specifically the excessive expansion of money supply brought about by the Federal Reserve, starting in the recession of 2001.
D)a huge and sudden drop in the velocity of money, causing a significant reduction in both nominal and real GDP.

Accepted Answer

The mainstream view attributes the 2007-2009 recession primarily to a financial crisis that led to reduced investment and consumption, decreasing aggregate demand.

Question 14

Assume monetary equilibrium exists; that is, the desired and actual supply of money are equal.Also assume that nominal GDP equals $960 billion and the money supply is $160 billion.From a strict monetarist view, an increase in the money supply by $12 billion will increase nominal GDP by
A)$13 billion.
B)$24 billion.
C)$72 billion.
D)$80 billion.

Accepted Answer

According to the strict monetarist view, the velocity of money is constant. Given the initial money supply of $160 billion and nominal GDP of $960 billion, the velocity is 6. An increase in the money supply by $12 billion would lead to an increase in nominal GDP by $12 billion * 6 = $72 billion.

Question 15

Coordination failures occur when people lack some way to jointly coordinate their actions to reach a(n)
A)unanticipated price level change.
B)fully anticipated price level change.
C)mutually beneficial equilibrium.
D)insider-outsider relationship.

Accepted Answer

Coordination failures occur when individuals or groups are unable to coordinate their actions to achieve a mutually beneficial equilibrium, leading to suboptimal outcomes.

Question 16

In the view of real-business-cycle theory, an increase in the long-run aggregate supply would lead to a(n)
A)increase in aggregate demand by an equal amount, so real output would increase and the price level would be unchanged.
B)increase in aggregate demand by an equal amount, so real output and the price level would increase.
C)decrease in aggregate demand, so real output would increase and the price level would decrease.
D)decrease in aggregate demand, so real output and the price level would increase.

Accepted Answer

According to real-business-cycle theory, an increase in long-run aggregate supply would lead to an increase in potential output. However, this increase in supply would not lead to an immediate increase in aggregate demand. In the short-run, prices might adjust slowly, but in the long-run they would adjust to reflect the increase in supply, leading to a higher output level and unchanged price level. Therefore, the correct answer is A.

Question 17

Real-business-cycle theory suggests that changes in
A)monetary policy are the single most important cause of macroeconomic instability.
B)investment spending will have a direct and significant effect on aggregate demand.
C)technology and resources affect productivity, and thus the long-run growth of aggregate supply.
D)the velocity of money is gradual and predictable, and thus is able to accommodate the long-run changes in nominal GDP.

Accepted Answer

Real-business-cycle theory posits that changes in technology and resources affect productivity, which in turn influences the long-run growth of aggregate supply, rather than focusing on monetary policy or demand-side factors.

Question 18

If M is $800, P is $2, and Q is 1,200, then
A)aggregate expenditures will be $1,600.
B)aggregate expenditures will be $960,000.
C)V must be 3.
D)V must be 1.5.

Accepted Answer

According to the formula for aggregate expenditures, AE = C + I + G + NX, where C is consumption, I is investment, G is government spending, and NX is net exports. In the equation given in the question, M (which represents consumption) is not defined or given, so it cannot be used to calculate aggregate expenditures directly. However, we can use the formula in another way to determine the value of V (velocity of money). 
Using the formula, M x V = P x Q, we can substitute the values given in the question: 
800 x V = 2 x 1,200 
V = 3 
This means that each dollar of income is being spent three times (on average) in the economy, and this information can be used to determine aggregate expenditures. 
AE = M x V + I + G + NX 
Since I, G, and NX are not given or defined, we can assume they are zero (i.e. no investment, government spending, or net exports). 
AE = 800 x 3 = 2,400 
Therefore, the answer is not A or B, and the best choice is C since it correctly calculates V based on the given information.

Question 19

Real-business-cycle theory focuses on factors affecting
A)aggregate demand.
B)aggregate supply.
C)the velocity of money.
D)consumer spending.

Accepted Answer

Real-business-cycle theory focuses on factors affecting aggregate supply, rather than aggregate demand, velocity of money, or consumer spending.

Question 20

If the money supply rises from $600 billion to $800 billion and nominal GDP stays unchanged at $4,800 billion, then the income velocity of money
A)rises by 33 percent.
B)falls by 33 percent.
C)rises from 6 to 8.
D)falls from 8 to 6.

Accepted Answer

The quantity theory of money states that MV=PY, where M is the money supply, V is the velocity of money, P is the price level, and Y is real GDP.

If nominal GDP (PY) is unchanged at $4,800 billion, and the money supply (M) rises from $600 billion to $800 billion, then the velocity of money (V) must fall to maintain the equation:

MV = PY 
(800)V = (4,800)

Solving for V, we get:

V = 6

So, the income velocity of money falls from 8 to 6.

Quiz 39: Current Issues in Macro Theory and Policy

If nominal GDP is $848 billion and the velocity of money is 4, then the

If money supply is $800 billion and nominal GDP is $2 trillion, then the average number of times that money is spent and changes hands is

Monetarists would argue that the severe recession of 2007-2009 was primarily caused by

According to real-business-cycle theory, recessions are caused by

If the economy diverges from its full-employment output, new classical economics would suggest that

If the velocity of money remains unchanged and the economy is at full employment, then the equation of exchange predicts that a rise in the money supply will

In real-business-cycle theory, changes in the

Assume that M is $200 billion and V is 6.If V increases by 15 percent, then, according to the monetarist equation, nominal GDP will have increased by

If households and firms cut back on spending because they expect other households and firms to do so, and this self-fulfilling prophecy causes a recession, then this would be an example of

The idea that business fluctuations are primarily caused by factors affecting aggregate supply rather than aggregate demand is a central tenet of

If the amount of money in circulation is $8 billion and the value of total output is $40 billion in an economy, then the

Mainstream economics views monetary policy as a

In the mainstream view, the severe recession of 2007-2009 was caused by

Assume monetary equilibrium exists; that is, the desired and actual supply of money are equal.Also assume that nominal GDP equals $960 billion and the money supply is $160 billion.From a strict monetarist view, an increase in the money supply by $12 billion will increase nominal GDP by

Coordination failures occur when people lack some way to jointly coordinate their actions to reach a(n)

In the view of real-business-cycle theory, an increase in the long-run aggregate supply would lead to a(n)

Real-business-cycle theory suggests that changes in

If M is $800, P is $2, and Q is 1,200, then

Real-business-cycle theory focuses on factors affecting

If the money supply rises from $600 billion to $800 billion and nominal GDP stays unchanged at $4,800 billion, then the income velocity of money