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64. Refer to Exhibit 14-1. What sequence of points shows the short- and long-run consequences of a rise in the money
supply under monetarist assumptions?
a.
A-E-B
b.
B-D-A
c.
A-D-B
d.
B-A
65. Refer to Exhibit 14-1. What sequence of points shows the short- and long-run consequences of a fall in velocity under
monetarist assumptions?
a.
A-E-B
b.
B-D-A
c.
A-D-B
d.
B-A
66. Refer to Exhibit 14-1. Starting from point A, a one-shot, demand-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.
67. If the Fed increases its open market purchases of government securities, it exerts a downward pressure on the interest
rate. Such a phenomenon is usually referred to as the ___________________ effect.
a.
income
b.
substitution
c.
open market
d.
liquidity
e.
expectations
68. Which of the following variables is capable of continually increasing aggregate demand with no offsetting influence
on any of the components of total spending?
a.
the inflation rate
b.
the interest rate
c.
government spending
d.
the money supply
e.
the wage rate
69. The aggregate supply curve in the short run is vertical in __________ version of the AD-AS framework.
a.
the simple quantity theory of money
b.
the monetarist
c.
both the simple quantity theory of money and the monetarist
d.
neither the simple quantity theory of money nor the monetarist
70. The assumption made about Real GDP in the simple quantity theory of money produces a ____________________
curve in the AD-AS version of the theory.
a.
horizontal AD
b.
vertical AD
c.
horizontal AS
d.
vertical AS
71. According to the simple quantity theory of money in the AD-AS framework, the AD curve is
a.
vertical.
b.
downward sloping.
c.
horizontal.
d.
upward sloping.
72. According to the simple quantity theory of money in the AD-AS framework, when the money supply decreases, the
__________ curve shifts to the __________.
a.
AD; left
b.
AD; right
c.
AS; left
d.
AS; right
73. According to the simple quantity theory of money in the AD-AS framework, when the money supply increases, the
result is __________ in Real GDP and __________ in the price level.
a.
no change; no change
b.
a rise; no change
c.
no change; a rise
d.
a rise; a fall
e.
a fall; a rise
74. According to the simple quantity theory of money in the AD-AS framework, when the money supply decreases, the
result is __________ in Real GDP and __________ in the price level.
a.
no change; no change
b.
a rise; no change
c.
no change; a rise
d.
a rise; a fall
e.
no change; a fall
75. In the monetarist version of the AD-AS framework, an increase in the money supply produces a __________ shift of
the __________ curve.
a.
rightward; AD
b.
rightward; SRAS
c.
leftward; AD
d.
leftward; SRAS
76. In the monetarist version of the AD-AS framework, a decrease in velocity produces a __________ shift of the
__________ curve.
a.
rightward; AD
b.
rightward; SRAS
c.
leftward; AD
d.
leftward; SRAS
77. In the monetarist version of the AD-AS framework, starting from long-run equilibrium, an increase in the money
supply produces
a.
no change in Real GDP in the short run or the long run.
b.
a rise in Real GDP in both the short run and the long run.
c.
a rise in Real GDP in the short run, but not in the long run.
d.
a rise in Real GDP in the long run, but not in the short run.
78. In the monetarist version of the AD-AS framework, starting from long-run equilibrium, a decrease in velocity
produces
a.
no change in Real GDP in the short run or the long run.
b.
a rise in Real GDP in both the short run and the long run.
c.
a fall in Real GDP in both the short run and the long run.
d.
a fall in Real GDP in the short run, but not in the long run.
e.
no change in Real GDP in the short run, but a rise in the long run.
79. Suppose we are at a long-run equilibrium point in an AD-AS model. Then the money supply falls. In the short run, is
there any difference between what happens in the simple quantity theory of money (SQTM) version and the monetarist
version of the model?
a.
There is no difference.
b.
In the SQTM version, the price level falls; in the monetarist version, it does not.
c.
In the monetarist version, Real GDP falls; in the SQTM version, it does not.
d.
In the monetarist version, the price level falls; in the SQTM version, it does not.
e.
In the SQTM version, Real GDP falls; in the monetarist version, it does not.
80. Suppose we are at a long-run equilibrium point in an AD-AS model. Then the money supply increases. In the short
run, is there any difference between what happens in the simple quantity theory of money (SQTM) version and the
monetarist version of the model?
a.
There is no difference.
b.
In the SQTM version, the price level rises; in the monetarist version, it does not.
c.
In the monetarist version, the price level falls; in the SQTM version, it does not.
d.
In the monetarist version, the Real GDP rises; in the SQTM version, it does not.
e.
In the SQTM version, Real GDP falls; in the monetarist version, it does not.
81. Which of the following statements is false?
a.
Monetarists believe that the velocity of money is highly stable.
b.
Monetarists believe that the velocity of money is predictable.
c.
Monetarists believe that the economy will settle into long-run equilibrium at less than full employment output.
d.
Monetarists believe that output can be at less than full employment output in the short run.
82. Which of the following statements is true?
a.
To a large degree, Keynesians focus on the spending components of total expenditures when they seek to
understand what determines GDP; monetarists focus on the money supply and velocity when their objective is
the same.
b.
To a large degree, monetarists focus on the spending components of total expenditures when they seek to
understand what determines GDP; Keynesians focus on the money supply and velocity when their objective is
the same.
c.
Both Keynesians and monetarists focus on the spending components of total expenditures when they seek to
understand what determines GDP; neither group focuses on the money supply and velocity.
d.
Neither Keynesians nor monetarists focus on the spending components of total expenditures when they seek to
understand what determines GDP; both focus on the money supply and velocity.
83. If GDP is $9,000 billion and the money supply is $1,800 billion, velocity is approximately
a.
0.20.
b.
6.00.
c.
4.15.
d.
5.00.
e.
There is not enough information provided to answer this question.
84. According to the simple quantity theory of money, if the money supply falls by 20 percent,
a.
the price level will fall by 20 percent.
b.
Real GDP will rise by less than 20 percent.
c.
GDP will fall by 20 percent.
d.
velocity will rise.
e.
a and c
85. The money supply falls from $1,200 billion to $1,160 billion. According to the simple quantity theory of money, the
price level will decline by __________ percent.
a.
3.33
b.
4.68
c.
5.09
d.
7.65
86. If the simple quantity theory of money predicts well, what would we expect to see (in the real world)?
a.
changes in the money supply strongly correlated with changes in interest rates
b.
changes in the money supply strongly correlated with changes in inflation rates
c.
changes in Real GDP strongly correlated with changes in the money supply
d.
changes in velocity strongly correlated with changes in the money supply
e.
none of the above
87. According to the simple quantity theory of money, an increase in the money supply will shift the __________ curve to
the right and raise __________.
a.
AD; Real GDP
b.
AS; the price level
c.
AD; the price level
d.
AS; Real GDP
e.
none of the above
88. Which of the following statements is false?
a.
The exchange equation assumes that velocity is constant.
b.
Velocity is the average number of times a dollar is spent to buy final goods and services in a year.
c.
The simple quantity theory of money predicts that changes in the money supply lead to strictly proportional
changes in the price level.
d.
In the simple quantity theory of money the aggregate supply curve is vertical.
89. According to Milton Friedman, continued inflation is always and everywhere
a.
a supply-side phenomenon.
b.
caused by continued decreases in aggregate supply.
c.
caused by continued increases in the budget deficit.
d.
a monetary phenomenon.
e.
none of the above
90. The economy is initially in long-run equilibrium. The AD curve shifts to the right and the price level rises. Assuming
that the economy is self-regulating, the SRAS curve will shift to the left and the price level will rise even further. If the
price level now remains constant, what have we witnessed?
a.
one-shot demand-induced inflation
b.
continued demand-induced inflation
c.
one-shot supply-induced inflation
d.
one-shot inflation that was partly demand-induced and partly supply-induced
e.
continued supply-side inflation
91. One-shot inflation can be caused by
a.
increases in aggregate demand only.
b.
decreases in aggregate supply only.
c.
either increases in aggregate demand or decreases in aggregate supply.
d.
neither increases in aggregate demand nor decreases in aggregate supply.
92. When Milton Friedman said that inflation is always and everywhere a monetary phenomenon, he was referring to
a.
one-shot inflation
b.
supply-induced inflation
c.
continued inflation
d.
hyperinflation (high rates of inflation)
e.
all kinds of inflation
93. If the nominal interest rate is 4 percent and the expected inflation rate is 1 percent, the real interest rate is
a.
3 percent.
b.
5 percent.
c.
4 percent.
d.
1.50 percent.
e.
0.25 percent.
94. Changes in the money supply can affect
a.
expected inflation rates.
b.
actual inflation rates.
c.
the supply of loans.
d.
a and b
e.
a, b and c
95. When the Fed conducts open market operations, the impact of the buying or selling of bonds will include changes in
a.
the money supply.
b.
interest rates.
c.
the expected rate of inflation.
d.
a and c
e.
a, b and c
96. When the Fed conducts open market operations, the impact of the buying or selling of bonds will include changes in
a.
SRAS.
b.
interest rates.
c.
LRAS.
d.
a and b
e.
a, b and c
97. The increase in the interest rate due to a higher expected inflation rate is called the __________ effect.
a.
expectations
b.
Fisher
c.
liquidity
d.
income
e.
a or b
98. According to monetarists, if the economy is initially in long-run equilibrium, an increase in the money supply will
__________ the price level and Real GDP in the short run, and will __________ only __________ in the long run.
a.
lower; lower; the price level
b.
raise; raise; Real GDP
c.
raise; lower; Real GDP
d.
raise; raise; the price level
e.
raise; raise; the unemployment rate
Exhibit 14-2
99. Refer to Exhibit 14-2. The economy moves from point 1 to 2 to 3 to 4 to 5 to 6 to 7. What explains this?
a.
an initial decrease in SRAS, followed by alternating rises in AD and decreases in SRAS
b.
continued increases in AD
c.
continued decreases in SRAS
d.
an initial rise in the price level, followed by a decrease in SRAS, and then alternating increases in AD and
decreases in SRAS
e.
continued increases in SRAS
100. Refer to Exhibit 14-2. The economy moves from point 1 to 2 to 3 to 4 to 5 to 6 to 7. Is this consistent with one-shot
declines originating on the supply-side of the economy combined with continued increases in aggregate demand?
a.
No, continued supply-induced inflation would be more likely to move the economy from point 1 to 2 and then
in a northwesterly direction from point 2.
b.
No, continued supply-induced inflation would be more likely to move the economy from point 1 to 3 to 5.
c.
No, continued supply-induced inflation would be more likely to move the economy from 1 to 2 and then in a
southwesterly direction from point 2.
d.
Yes.
101. Monetarists believe that velocity
a.
is constant.
b.
changes erratically.
c.
and the money supply always have an inverse relationship.
d.
changes in a way that can be understood and predicted.
102. If the money supply is $6,000, velocity is 5, and Real GDP is 10,000 units of output, then the price level
is _____________. If the money supply doubled over a short time period to $12,000, the simple quantity theory of money
would predict that _____________________.
a.
$3; the price level would double
b.
$3; Real GDP would double
c.
$3; the price level would be cut in half
d.
$2; the price level would double
103. If the money supply is $3,000, velocity is 4 and the price level is $2, then Real GDP is _____________ units of
output. If the money supply doubled over a short time period to $6,000, the simple quantity theory of money would
predict that ______________________.
a.
3,000; the price level would double
b.
6,000; Real GDP would double
c.
625; the price level would be cut in half
d.
6,000; the price level would double
104. Based upon the equation of exchange, which of the following (ceteris paribus) is most likely to bring about inflation?
a.
An increase in the money supply.
b.
A decrease in velocity.
c.
An increase in Real GDP.
d.
a and b
e.
a and c
105. When a country imposes and maintains price controls, inflation
a.
can never occur.
b.
will result in a general surplus of goods and services.
c.
is felt through long lines of people wanting to buy goods.
d.
has been legislated away.
106. The equation of exchange is an economic theory.
a.
True
b.
False
107. In the simple quantity theory of money, Real GDP and velocity are assumed to be constant.
a.
True
b.
False
108. The aggregate supply curve is depicted as vertical in the simple quantity theory of money.
a.
True
b.
False
109. One-shot inflation can result from an increase in aggregate demand or an increase in aggregate supply.
a.
True
b.
False
110. Monetarists believe that an increase in the money supply will raise both Real GDP and the price level in the short
run, and will only raise Real GDP in the long run.
a.
True
b.
False
111. Both the monetarist view of the economy and the simple quantity theory of money hold that velocity is constant.
a.
True
b.
False
112. One example of one-shot inflation occurs when the SRAS curve shifts leftward.
a.
True
b.
False
113. The true cost of borrowing is the nominal interest rate.
a.
True
b.
False
114. The simple quantity theory of money predicts that the larger the percentage change in the money supply, the larger
the percentage change in Real GDP.
a.
True
b.
False
115. The California gold rush resulted in an increase in the amount of money in circulation and an increase in prices
across the country.
a.
True
b.
False
116. Real estate in San Francisco that sold for $16 before gold was discovered in California was valued at $4,500 eighteen
months later, as a result of the gold rush.
a.
True
b.
False
117. Between 1890 and 1914, the gold stock of the world doubled, but world prices fell during this time.
a.
True
b.
False
118. The spread (difference) between the yield on conventional bonds and the yield on indexed bonds with the same
maturities is an indication of the expected inflation rate.
a.
True
b.
False
119. In seeking to explain what determines GDP, monetarists focus on the money supply while Keynesians focus on the
spending components of total expenditures.
a.
True
b.
False
120. Describe the difference between the simple quantity theory of money and the equation of exchange.
121. Explain how a change in the money supply can affect the following in the short run:
a.
The supply of loanable funds
b.
Real GDP
c.
The price level
d.
The expected inflation rate
122. Describe the expectations (or Fisher) effect.
123. List and describe the four positions held by monetarists that help to explain the monetarists view of the economy.
124. Explain in detail how the California gold rush contributed to rising prices in the early 1850’s.
125. What is the only factor that can continually increase in such a way as to bring about continued increases in aggregate
demand, and thus bring about continued inflation? Give two reasons why government purchases cannot continually
increase, and so cannot be the cause of continued inflation.
