1. Monetarists can be described as a group of macroeconomists who
a.
emphasize the importance of the federal government’s involvement in the economy to dampen the harmful
effects of the business cycle.
b.
emphasize the importance of the money supply as a determinant of macroeconomic activity.
c.
tend to view government spending and taxation policy as the chief means of stabilizing the economy.
d.
feel that money should not be created in the private banking system, but only by government.
2. Which of the following statements is true?
a.
Monetarists believe that the government should be very involved in managing and directing the economy.
b.
Monetarists believe that the economy is self-regulating.
c.
There is very little difference between monetarist and Keynesian thought.
d.
Monetarists hold that velocity is constant.
e.
a and c
b
1
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3. Which of the following statements is true?
a.
Velocity equals the money supply.
b.
GDP is larger than the money supply if velocity is greater than 1.
c.
The money supply must be equal to GDP.
d.
GDP is always twice the money supply.
b
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4. In the equation of exchange, the letter “V” stands for
a.
variance.
b.
validity.
c.
volume.
d.
velocity.
d
b
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5. In the equation of exchange, the money supply multiplied by velocity equals
a.
b.
c.
d.
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6. The equation of exchange is
a.
an identity.
b.
a theory.
c.
an abstraction
d.
a hypothesis.
e.
a, b, and c
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7. In the equation of exchange, GDP divided by the money supply is equal to
a.
M.
b.
V.
c.
P.
d.
Q.
b
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8. In the equation of exchange, “PQ” stands for
a.
GDP.
b.
Real GDP.
c.
nominal investment.
d.
real investment.
9. The velocity of money is the __________ number of times a dollar is spent to buy final goods and services in a year.
a.
total
b.
average
c.
marginal
d.
statistical
b
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10. In the equation of exchange, “Q” stands for
a.
the interest rate.
b.
quality.
c.
GDP.
d.
Real GDP.
d
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11. In the equation of exchange, the average number of times a dollar is used to purchase a final good or service is the
__________ of money.
a.
turnover
b.
elasticity
c.
velocity
d.
transfer
1
1
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12. The simple quantity theory of money predicts that changes in
a.
the money supply lead to strictly proportional changes in the price level.
b.
the money supply do not affect the price level.
c.
the price level lead to strictly proportional changes in velocity and GDP.
d.
velocity lead to nearly proportional changes in the money supply.
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13. The simple quantity theory of money predicts that if
a.
the money supply rises by $200, then GDP falls by $200.
b.
GDP rises by $400, then the money supply rises by $400.
c.
the money supply rises by 10 percent, then the price level rises by 10 percent.
d.
the money supply falls by $300, then GDP rises by $300.
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14. The simple quantity theory of money assumes that
a.
velocity and Real GDP are constant.
b.
only velocity is constant.
c.
only the money supply is constant.
d.
only the price level is constant.
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15. In symbols, the equation of exchange says
a.
MP = QV.
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b.
MQ = PV.
c.
MV = PQ.
d.
MP = MQ.
16. Velocity equals GDP __________ the money supply.
a.
plus
b.
multiplied by
c.
divided by
d.
minus
1
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17. Which of the following is consistent with the equation of exchange?
a.
Total spending must equal the total sales revenues of business firms.
b.
The money supply multiplied by velocity must equal GDP.
c.
The money supply multiplied by velocity must equal the price level times Real GDP.
d.
a and b
e.
a, b and c
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18. The equation of exchange
a.
is a theory of the macroeconomy as it stands.
b.
can be turned into a theory of the macroeconomy if certain assumptions are made about some of its variables.
c.
cannot be turned into a theory of the macroeconomy.
d.
is a theory in microeconomics as it stands.
1
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19. If V is constant, the rate of growth of M that is consistent with a stable price level is
a.
zero.
b.
the rate of growth of PQ.
c.
the rate of growth of Q.
d.
the expected rate of inflation.
e.
none of the above
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20. If M = $5,000, P = $20, and Q = 2,000, then V is
a.
2.0.
b.
4.0.
c.
5.0
d.
6.0
e.
8.0
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21. “The money supply multiplied by velocity must equal GDP” is a statement of the
a.
simple quantity theory of money.
b.
equation of exchange.
c.
modern quantity theory of money.
d.
all of the above
b
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22. The simple quantity theory of money predicts that an increase in M of 5 percent will lead to
a.
an increase in P of 5 percent.
b.
an increase in P of less than 5 percent.
c.
an increase in P of more than 5 percent.
d.
a decrease in P of 5 percent.
e.
a decrease in P of more than 5 percent.
23. If the money supply is $900, velocity is 6, then in the equation of exchange, PQ is
a.
$150.
b.
$1,500.
c.
$2,400.
d.
$3,600.
d
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24. If GDP is $12,000 and velocity is 4, the money supply is
a.
$27,000.
b.
$12,000.
c.
$4,000.
d.
$3,000.
e.
There is not enough information provided to answer this question.
d
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25. If Real GDP is $8,000, the money supply is $3,100, and velocity is 4, then the price level is
a.
1.92.
b.
4.69.
1
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c.
1.55.
d.
3.33.
26. If Real GDP is $8,000, the money supply is $4,000, and the price level is 3, then velocity is
a.
2.00.
b.
3.33.
c.
6.00.
d.
7.50.
e.
none of the above
1
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27. According to the equation of exchange, if GDP equals $4 trillion and the money supply equals $1 trillion, the velocity
of money
a.
must be 0.25.
b.
must be 4.
c.
must be 0.25 trillion.
d.
must be 4 trillion.
e.
cannot be determined without knowing what the price level is.
b
1
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New
28. According to the equation of exchange, if Real GDP is $3 trillion and the money supply is $0.5 trillion, then velocity
a.
must be 6.
b.
must be 1/6.
c.
must be 4 trillion.
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d.
must be 1/4 trillion.
e.
cannot be determined without knowing what the price level is.
29. The simple quantity theory of money can be written as
a.
P = MV/Q.
b.
MV = Q/P.
c.
PM = VQ.
d.
Q = PMV.
e.
all of the above
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30. The chief difference between one-shot inflation and continued inflation is that
a.
Keynesians believe all inflations are one-shot inflations and monetarists believe all inflations are continued
inflations.
b.
one-shot inflation is long and continued inflation is short.
c.
one-shot inflation is a single increase in the price level and continued inflation is a sustained increase in the
price level.
d.
monetarists believe all inflations are one-shot inflations and Keynesians believe all inflations are continued
inflations.
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31. Suppose the economy starts off producing Natural Real GDP. Next, aggregate demand rises, ceteris paribus. As a
result, the price level rises in the short run. In the long run, when the economy has moved back to producing Natural Real
GDP, the price level will be
a.
higher than it was in short-run equilibrium.
b.
lower than it was in short-run equilibrium but higher than it was originally (before aggregate demand
increased).
c.
lower than it was originally (before aggregate demand increased).
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d.
equal to what it was originally (before aggregate demand increased).
32. Suppose the economy starts off producing Natural Real GDP. Next, aggregate supply rises, ceteris paribus. As a
result, the price level falls in the short run. In the long run, when the economy has moved back to producing Natural Real
GDP, the price level will be
a.
higher than it was in short-run equilibrium.
b.
lower than it was in short-run equilibrium but higher than it was originally (before aggregate supply rose).
c.
lower than it was originally (before aggregate supply rose).
d.
equal to what it was originally (before aggregate supply rose).
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33. One-shot inflation can originate
a.
only on the demand side of the economy.
b.
only on the supply side of the economy.
c.
on the demand side or the supply side of the economy.
d.
on neither the demand side nor the supply side of the economy.
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34. Can a one-time increase in the supply of money cause one-shot inflation?
a.
Yes, because it shifts the aggregate demand curve rightward.
b.
No, because it cannot shift the aggregate demand curve rightward.
c.
Yes, because it shifts the aggregate demand curve leftward.
d.
Yes, because it shifts the aggregate supply curve rightward.
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35. MV in the equation of exchange is also defined as
a.
national income.
b.
total expenditures.
c.
personal income.
d.
Real GDP.
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36. The California gold rush resulted in
a.
an increase in the amount of money in circulation and higher prices throughout the country.
b.
no change in the amount of money in circulation and higher prices throughout the country.
c.
an increase in the amount of money in circulation and higher prices only in California.
d.
no change in the amount of money in circulation and higher prices only in California.
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37. Between 1890 and 1914, the gold stock of the world _______________ and world prices (in general)
a.
doubled; increased.
b.
tripled; increased.
c.
rose by 50%; increased.
d.
doubled; decreased.
e.
tripled; decreased.
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38. Some economists argue that increases in government spending are not a likely source of continued inflation because
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a.
increases in government spending cause reductions in other spending components.
b.
government spending is not created by the Fed.
c.
increases in government spending can be financed by money creation.
d.
a and b
e.
a and c
39. When Milton Friedman said that “inflation is always and everywhere a monetary phenomenon,” he was referring to
a.
one-shot inflation.
b.
continued inflation.
c.
a and b
d.
neither a nor b
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40. Which of the following statements is true?
a.
Nominal interest rate = real interest rate – expected inflation rate.
b.
Nominal interest rate = real interest rate + expected inflation rate.
c.
Real interest rate = nominal interest rate + expected inflation rate.
d.
Expected inflation rate = nominal interest rate + real interest rate.
e.
Expected inflation rate = real interest rate – nominal interest rate.
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41. Monetarists believe that
a.
velocity changes in a predictable way.
b.
aggregate supply depends on the money supply and velocity.
c.
the SRAS curve is upward sloping.
d.
a and c
e.
a, b and c
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42. A monetarist would argue that
a.
small changes in M could be offset by changes in V and not cause changes in P.
b.
changes in M in the short run can cause Real GDP to fall.
c.
prices and wages are flexible.
d.
b and c
e.
a, b and c
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43. Monetarists believe
a.
Real GDP is not determined by M in the long run.
b.
velocity is constant.
c.
the SRAS curve is vertical.
d.
a and c
e.
a, b and c
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44. According to monetarists, changes in velocity can
a.
lower GDP
b.
raise GDP
c.
shift the SRAS, but not the LRAS
d.
a and b
e.
a, b and c
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45. The change in the interest rate due to a change in the supply of loanable funds is referred to as the __________ effect.
a.
income
b.
expectations
c.
liquidity
d.
real
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46. The change in the interest rate brought on by a change in Real GDP is referred to as the __________ effect.
a.
liquidity
b.
expectations
c.
income
d.
nominal
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47. The liquidity effect is the
a.
increase in the interest rate brought on by an increase in GDP.
b.
increase in the interest rate due to a higher expected inflation rate.
c.
decrease in the interest rate due to an increase in the supply of loanable funds.
d.
response, in terms of rate of flow, of the money supply to a change in government spending.
e.
rate of change in the price level caused by a change in the supply of money.
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48. Suppose the Fed buys government securities from the public. The liquidity effect of this is that the interest rate will
a.
increase.
b.
decrease.
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c.
remain constant.
d.
any of the above are possible
49. The income effect is the
a.
increase in the interest rate caused by an increase in Real GDP.
b.
increase in the interest rate due to a higher expected inflation rate.
c.
decrease in the interest rate due to an increase in the supply of loanable funds.
d.
change in national income brought about by a change in interest rates.
e.
rate of change in national income brought about by a change in the supply of money.
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50. The expectations effect is the
a.
increase in the interest rate brought on by an expected increase in Real GDP.
b.
increase in the interest rate due to a higher expected inflation rate.
c.
decrease in the interest rate due to an expected increase in the supply of loanable funds.
d.
idea that people form their expectations of inflation by considering all available information about past,
present, and future inflation.
e.
idea that people form their expectations of inflation by considering only information about past inflation
experience.
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51. Ceteris paribus, the greater the increase in the money supply, the __________ the inflation rate, the __________ the
expected inflation rate, and the __________ the interest rate.
a.
higher; higher; higher
b.
lower; lower; lower
c.
higher; lower; higher
d.
lower; higher; lower
e.
higher; lower; lower
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52. An increase in the money supply that leads to an increase in expected inflation, which in turn leads to an increase in
the interest rate, is best described as the
a.
liquidity effect.
b.
income effect.
c.
expectations effect.
d.
adaptive expectations theory.
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53. Continued inflation occurs
a.
if there is a sustained increase in the price level.
b.
only if there is a sustained increase in the price of every good and service.
c.
only if there is a sustained increase in the price of every good and service by the same dollar amount.
d.
only if there is a sustained increase in the price of every good and service by the same percentage.
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54. Grade inflation at colleges and universities is _________ to general price inflation in that ______________.
a.
similar; both can be deceptive.
b.
not comparable; it is impossible for grades to be inflated.
c.
similar; grades tend to go up when prices are rising.
d.
not comparable; grades tend to fall while prices tend to rise.
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55. Real-world continued inflation is probably a result of continued
a.
increases in aggregate demand.
b.
decreases in aggregate demand.
c.
increases in aggregate supply.
d.
decreases in aggregate supply.
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56. Which of the following factors can change continually in such a way as to bring about continued increases in
aggregate demand?
a.
autonomous consumption
b.
autonomous investment
c.
government spending
d.
the money supply
e.
all of the above
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57. The liquidity effect is the
a.
decrease in the interest rate due to an increase in the supply of loanable funds.
b.
increase in the interest rate due to an increase in national income.
c.
increase in the interest rate due to a higher expected inflation rate.
d.
increase in the interest rate due to an increase in the price level.
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58. A decrease in the interest rate due to an increase in the supply of loanable funds is referred to as the __________
effect.
a.
expectations
b.
liquidity
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c.
income
d.
a and c
e.
a, b and c
Exhibit 14-1
59. Refer to Exhibit 14-1. Starting from point A, a one shot, supply-side-induced inflation raises the price level in the
economy to P2. Assuming no other changes, in the long run the economy is likely to settle at point
a.
A.
b.
B.
c.
C.
d.
D.
e.
E.
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60. Refer to Exhibit 14-1. A continued increase in the money supply by the Fed is likely to take the economy along which
of the following paths?
a.
A-E-B-H-C
b.
A-D-B-I-C
c.
A-D-F-H-C
d.
A-D-B-H-C
e.
A-E-B-I-C
b
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61. Refer to Exhibit 14-1. A continued increase in the price of oil, combined with Fed attempts to respond to these oil
shocks by increasing aggregate demand, is likely to take the economy along which of the following paths?
a.
A-E-B-H-C
b.
A-E-G-I-C
c.
A-D-B-E-A
d.
A-D-B-H-C
e.
A-E-B-I-C
d
1
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62. Refer to Exhibit 14-1. What sequence of points shows the short- and long-run consequences of a rise in velocity under
monetarist assumptions?
a.
A-E-B
b.
B-D-A
c.
A-D-B
d.
B-A
1
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63. Refer to Exhibit 14-1. What sequence of points shows the short- and long-run consequences of a fall in the money
supply under monetarist assumptions?
a.
A-E-B
b.
B-D-A
c.
A-D-B
d.
B-A
b
1
United States – BUSPROG: Analytic
1
Challenging
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