Question 1

The equation of exchange suggests that if the velocity of money and the quantity of goods and services are held constant, a(n):
A) Decrease in the money supply will increase the price level
B) Increase in the money supply will decrease the price level
C) Increase in the money supply will increase the price level
D) Decrease in the money supply will have no effect on the price level

Accepted Answer

According to the equation of exchange (MV = PQ), an increase in the money supply (M) will result in an increase in prices (P) if the velocity of money (V) and the quantity of goods and services (Q) stay constant. Therefore, the best choice is C, which states that an increase in the money supply will increase the price level.

Question 2

In the mainstream view, the economic instability brought about by "oil shocks" works through changes in:
A) Aggregate demand
B) Wage and price inflexibility
C) Money supply
D) Aggregate supply

Accepted Answer

Oil shocks typically affect the economy by altering the aggregate supply, as they increase production costs, leading to reduced output and higher prices.

Question 3

According to mainstream economists the basic determinant of real output, employment, and the price level is:
A) Information and people's expectations
B) The level of aggregate expenditures
C) The incentive to work, save, and invest
D) The supply of money

Accepted Answer

According to Keynesian and other mainstream economists, the level of aggregate expenditures, such as consumer and investment spending, government purchases, and net exports, is the primary determinant of real GDP, employment, and the price level in the short run. This is because changes in aggregate expenditures are assumed to directly affect aggregate demand, which in turn affects output, employment and prices.

Question 4

The equation of exchange indicates that:
A) MQ equals VP
B) The velocity of money and the supply of money vary proportionately with one another
C) Other things being equal, an increase in V will increase P and/or Q
D) Other things being equal, M and P are inversely related

Accepted Answer

The equation of exchange 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 exchanged. According to this equation, an increase in V will result in an increase in P and/or Q, assuming that M and Q remain constant. Therefore, choice C is correct. Option A is incorrect because it does not reflect the equation of exchange. Option B is incorrect because the velocity of money and the supply of money may not vary proportionately. Option D is incorrect since M and P are directly related according to the equation of exchange.

Question 5

From the mainstream perspective, instability in the economy is due to:
A) Price flexibility, and shocks to either aggregate demand or aggregate supply
B) Price stickiness, and shocks to either aggregate demand or aggregate supply
C) Price flexibility, and government policies and regulation
D) Price stickiness, and government policies and regulation

Accepted Answer

The mainstream perspective holds that the instability in the economy is due to price stickiness and shocks to either aggregate demand or aggregate supply. Price stickiness means that prices do not adjust quickly to changes in supply and demand, resulting in market inefficiencies and economic fluctuations. Shocks to aggregate demand or aggregate supply refer to sudden changes in consumer spending, business investment, government spending, or import/export activity, which can lead to recessions, inflation, or deflation. Government policies and regulation may also play a role in economic instability, but they are not considered the primary cause according to mainstream economics.

Question 6

From a monetarist perspective, instability in the macro economy arises from:
A) Secular trends in the economy
B) The instability of velocity as a policy tool
C) Discretionary changes in monetary policy
D) The use of a monetary rule for monetary policy

Accepted Answer

Monetarists believe that discretionary changes in monetary policy, such as those made by central banks in response to short-term economic conditions, lead to instability in the macro economy. Monetarists advocate for a rules-based approach to monetary policy, which keeps the money supply in line with long-term trends in the economy, to avoid such instability. Therefore, the answer is C.

Question 7

In the monetarist view:
A) Changes in investment spending are a major source of macroeconomic instability
B) Inappropriate monetary policy is a major source of macroeconomic stability
C) Adverse aggregate supply shocks are a major source of macroeconomic instability
D) The fact that prices and wages are flexible is a major source of macroeconomic instability

Accepted Answer

The answer of In the monetarist view:
A) Changes in investment...

Question 8

In the mainstream view, one major source of instability in the macro economy is the volatility of:
A) Product prices
B) Investment spending
C) Consumer spending
D) Labor wages

Accepted Answer

Investment spending is considered a major source of instability in the macro economy because it can be highly unpredictable and can fluctuate rapidly based on various factors such as changes in interest rates, market confidence, and government policies. When investment spending becomes highly volatile, it can lead to wider economic instability, such as recession or inflation. The other options, while important, do not have the same level of impact on macroeconomic stability as investment spending. Product prices, consumer spending, and labor wages can all fluctuate, but they typically do not have the same level of impact on the overall health of the economy.

Question 9

Which of the following is the basic equation underlying aggregate expenditures? A) MV = PQ B) AS = AD C) Saving = Income - Consumption D) C_a + I_g + X_n + G = GDP

Accepted Answer

The basic equation underlying aggregate expenditures is the sum of consumption (C_a), gross investment (I_g), net exports (X_n), and government spending (G), which equals the Gross Domestic Product (GDP).

Question 10

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

Monetarism views monetary policy as a stabilizing factor, while mainstream economics views it as a source of instability.

Question 11

Given the equation of exchange, if V is stable, an increase in M will necessarily increase:
A) The demand for money
B) The price level
C) Nominal GDP
D) Real GDP

Accepted Answer

According to the equation of exchange (MV=PY), if V is stable, an increase in M will lead to an equal increase in nominal GDP (PY). This means that nominal output and/or prices will rise as a result of the increase in the money supply (M). Therefore, Option C is the correct answer. Option A is incorrect because an increase in the money supply may lead to a decrease in the demand for money due to the increase in inflation. Option B is incorrect because an increase in the money supply may not necessarily lead to an increase in the price level if there is no change in the velocity of money. Option D is incorrect because the equation of exchange does not directly relate changes in the money supply to changes in real GDP.

Question 12

The equation of exchange is: A) AS = AD B) Saving = Income - Spending C) MV = PQ D) AD = C + I_g + G + X_n

Accepted Answer

The equation of exchange, also known as the quantity theory of money, is MV = PQ where M represents the money supply, V represents velocity of money, P represents the price level, and Q represents the quantity of goods and services. This equation shows the relationship between money supply, velocity of money, price level, and production of goods and services.

Question 13

Monetarists argue that the amount of money the public will want to hold depends primarily on the level of:
A) Nominal GDP
B) Investment
C) Consumption
D) Prices

Accepted Answer

Monetarists believe that the demand for money is primarily related to nominal GDP, as it reflects the overall economic activity and income levels, influencing how much money people want to hold.

Question 14

In the monetarist equation of exchange, MV is the monetarist counterpart of:
A) Money supply
B) Aggregate expenditures
C) Total saving
D) Government spending

Accepted Answer

The monetarist equation of exchange is MV = PQ, where MV represents the total money supply times the velocity of money, which is equivalent to aggregate expenditures or nominal GDP (PQ).

Question 15

The average number of times per year that a dollar bill is used to pay for final goods and services is the:
A) Monetary rule
B) Velocity of money
C) Asset demand for money
D) Transactions demand for money

Accepted Answer

The average number of times per year that a dollar bill is used to pay for final goods and services is referred to as the velocity of money. It is a measure of how quickly money circulates within an economy.

Question 16

Dividing nominal gross domestic product (GDP) by the money supply (M) is a way to obtain the:
A) Velocity of money
B) Monetary multiplier
C) Equation of exchange
D) Monetary rule

Accepted Answer

Dividing nominal GDP by the money supply gives the velocity of money, which measures how frequently money changes hands in the economy. This equation is known as the Quantity Theory of Money and is expressed as MV=PY, where M is the money supply, V is velocity, P is the price level, and Y is real output.

Question 17

The view that changes in the money supply is the primary cause of change in real output and the price level is most closely associated with:
A) Rational expectations theory
B) Real business cycle theory
C) Mainstream economics
D) Monetarism

Accepted Answer

The view that changes in the money supply is the primary cause of change in real output and the price level is a key premise of Monetarism. Monetarists believe that changes in the money supply can directly affect real economic variables such as output and employment in the short run, and that the long-run impact of monetary policy is mainly on the price level.

Question 18

Monetarists argue that the relationship between:
A) The quantity of money the public wants to hold and the level of GDP is not stable
B) The quantity of money the public wants to hold and the level of GDP is stable
C) The quantity of money the public wants to hold and the level of saving is stable
D) Velocity and the interest rate varies directly

Accepted Answer

Monetarists argue that the quantity of money people want to hold is stable in the long run and that changes in the money supply have a proportionate effect on nominal GDP. This is known as the quantity theory of money, which states that the price level is determined by the money supply and the velocity of money. Therefore, according to monetarists, there is a stable relationship between the quantity of money people want to hold and the level of GDP.

Question 19

In the strict monetarist view, a large increase in the money supply will have:
A) A large impact on the velocity of money and a large impact on nominal output
B) A large impact on the velocity of money and a small impact on nominal output
C) No effect on the velocity of money and a large impact on nominal output
D) No effect on the velocity of money and a small impact on the nominal output

Accepted Answer

Strict monetarists believe that the velocity of money is stable, so a large increase in the money supply will primarily affect nominal output, not the velocity.

Question 20

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 = 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. If the velocity of money remains unchanged and the economy is at full employment, then Q is fixed. As a result, an increase in the money supply (M) will lead to an increase in prices (P). This is because there is more money chasing a fixed amount of goods and services, leading to inflation.

Quiz 19: Current Issues in Macro Theory and Policy

The equation of exchange suggests that if the velocity of money and the quantity of goods and services are held constant, a(n) :

In the mainstream view, the economic instability brought about by "oil shocks" works through changes in:

According to mainstream economists the basic determinant of real output, employment, and the price level is:

The equation of exchange indicates that:

From the mainstream perspective, instability in the economy is due to:

From a monetarist perspective, instability in the macro economy arises from:

In the monetarist view:

In the mainstream view, one major source of instability in the macro economy is the volatility of:

Which of the following is the basic equation underlying aggregate expenditures?

Mainstream economics views monetary policy as a:

Given the equation of exchange, if V is stable, an increase in M will necessarily increase:

The equation of exchange is:

Monetarists argue that the amount of money the public will want to hold depends primarily on the level of:

In the monetarist equation of exchange, MV is the monetarist counterpart of:

The average number of times per year that a dollar bill is used to pay for final goods and services is the:

Dividing nominal gross domestic product (GDP) by the money supply (M) is a way to obtain the:

The view that changes in the money supply is the primary cause of change in real output and the price level is most closely associated with:

Monetarists argue that the relationship between:

In the strict monetarist view, a large increase in the money supply will have:

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: