Question 1

If you believe that velocity is constant and that the aggregate supply curve is horizontal,then the quantity theory of money would predict that a doubling of the money supply would cause a doubling of the

Accepted Answer

The answer of If you believe that velocity is constant...

Question 2

Both approaches-Keynesian and monetarist-are ways of analyzing

Accepted Answer

Both Keynesian and monetarist approaches are ways of analyzing aggregate demand. Keynesian theory focuses on the role of fiscal policy in influencing aggregate demand, while monetarism emphasizes the importance of monetary policy in controlling the money supply and its impact on aggregate demand. The other options listed are not central to either approach.

Question 3

Monetarism resembles Keynesian thinking in that they both

Accepted Answer

Both monetarism and Keynesianism emphasize the importance of demand-side effects. However, they differ in their policy recommendations, with monetarism emphasizing the role of monetary policy in controlling inflation and promoting economic growth, while Keynesianism favors fiscal policy interventions to stabilize the economy during downturns. Neither theory completely ignores supply-side factors.

Question 4

When comparing the Keynesian and monetarist approaches,the only substantive difference is that

Accepted Answer

The answer of When comparing the Keynesian and monetarist approaches,the...

Question 5

Monetarists have received this label because they emphasize the role of

Accepted Answer

Monetarists focus on the impact of the money supply on nominal GDP, as they believe that changes in the money supply directly affect the level of economic activity. They argue that the Fed can and should control the money supply to stabilize economic growth and prevent inflation.

Question 6

If economists say that a 7 percent growth in the money supply will increase aggregate demand by 7 percent,they are assuming that velocity

Accepted Answer

The equation of exchange (MV=PQ) assumes that velocity (V) is constant in the short run. Therefore, if the money supply (M) increases by 7 percent, it will lead to an increase in aggregate demand (PQ) by the same percentage.

Question 7

According to the monetarists,the velocity of money is

Accepted Answer

The answer of According to the monetarists,the velocity of money...

Question 8

The major difference between the Keynesian approach and the monetarist approach is that

Accepted Answer

The Keynesian approach emphasizes the role of government in influencing aggregate demand through fiscal policies, while the monetarist approach focuses on the role of money supply and its effect on interest rates and prices. In Keynesian analysis, changes in money supply affect the economy through their impact on interest rates, while monetarist analysis considers a wider range of channels through which monetary policy affects the economy. Therefore, B is the correct answer.

Question 9

According to the quantity theory of money currently used by monetarists,assuming velocity is constant (at a value of 5),a 10 percent increase in the money supply will raise

Accepted Answer

According to the quantity theory of money, MV=PQ, where M is the money supply, V is velocity, P is the price level, and Q is real GDP. If velocity is constant at 5, then an increase in M by 10% will result in a proportional increase in nominal GDP (PQ) by 10%. Therefore, the correct answer is C.

Question 10

If you believe that velocity is constant and that the aggregate supply curve is vertical,then the quantity theory of money would predict that a doubling of the money supply would cause a doubling of

Accepted Answer

The quantity theory of money, when assuming a constant velocity of money and a vertical aggregate supply curve (indicating no change in real output), predicts that doubling the money supply would double nominal output (prices) but leave real output unchanged. This is because the increase in money supply would lead to proportional inflation without affecting the actual production or real economy.

Question 11

In the monetarist view,the money supply affects the economy

Accepted Answer

In the monetarist view, changes in the money supply directly affect the economy by altering the level of total spending in the economy, regardless of interest rates. As the money supply increases, individuals and businesses have access to more funds, which can lead to increased spending and economic growth. Conversely, a decrease in the money supply can lead to decreased spending and economic contraction. Monetarists believe that the control of the money supply should be a primary tool of monetary policy.

Question 12

According to the simple quantity theory of money,a change in the money supply of 9.6 percent would lead to a

Accepted Answer

According to the simple quantity theory of money, the equation relating money supply (M), velocity of money (V), price level (P), and real output (Y) is MV=PY. Assuming that real output is constant in the short run, a change in the money supply (M) will lead to a proportional change in the nominal value of output (PY), with velocity of money (V) assumed to be constant. Therefore, a 9.6 percent increase in the money supply would lead to a 9.6 percent increase in nominal GDP (PY).

Question 13

A scatter diagram of money growth rates and inflation rates from 1982 to 2010 indicates

Accepted Answer

The answer of A scatter diagram of money growth rates...

Question 14

The difference between the equation of exchange and the quantity theory of money is that the

Accepted Answer

The quantity theory of money posits that the velocity of money is stable or changes very predictably, allowing for the prediction of the effects of changes in the money supply on the economy. This contrasts with the equation of exchange, which does not inherently assume a constant velocity of money but is a broader conceptual framework for understanding the relationship between the money supply, velocity of money, price level, and number of transactions.

Question 15

A factor increasing the popularity of monetarism in the late 1970s was the

Accepted Answer

The answer of A factor increasing the popularity of monetarism...

Question 16

Which of the following best describes the assumption that monetarists make regarding velocity?

Accepted Answer

Monetarists assume that velocity is predictable in the short run and in the long run, although changes in velocity may occur in response to changes in monetary policy. Therefore, choice A is the best description of the assumption that monetarists make regarding velocity.

Question 17

The major limitation of both the Keynesian approach and the monetarist approach is that both

Accepted Answer

Both the Keynesian and Monetarist approaches study the aggregate demand curve and focus on the determination of real GDP equilibrium without including the price level. However, to understand the relationship between price level and output, the aggregate supply curve must be included in the analysis. Therefore, the major limitation of both approaches is that they do not consider the aggregate supply curve, and thus cannot fully explain the relationship between price level and output.

Question 18

____ is a school of economic thought which uses equation of exchange to analyze the macro economic data.

Accepted Answer

Monetarism is the school of economic thought that uses equation of exchange to analyze the macroeconomic data. The equation of exchange is MV=PY, where M is the money supply, V is the velocity of money, P is the price level, and Y is the real output. Monetarists argue that changes in the money supply have a direct impact on inflation and economic growth.

Question 19

The relationship between money growth rates and inflation between 1982 and 2010 helps explain why,by the 1990s,most economists had

Accepted Answer

The answer of The relationship between money growth rates and...

Question 20

According to the quantity theory of money,a decision on the part of all business firms currently paying employees on a monthly basis to begin paying on a weekly basis would be expected to

Accepted Answer

The quantity theory of money suggests that the velocity of money is related to the frequency of transactions. If businesses start paying employees on a weekly basis instead of monthly, the money circulates more frequently, increasing the velocity of money. This could lead to an increase in nominal GDP if it stimulates more economic activity due to the increased circulation of money.

Quiz 15: The Debate over Monetary and Fiscal Policy