Question 1

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

Accepted Answer

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) .
D)  equal to what it was originally (before aggregate demand increased) .

Question 2

List and describe the four positions held by monetarists that help to explain the monetarists view of the economy.

Accepted Answer

Monetarists assume that velocity changes...

Question 3

The money supply falls from $1,200 billion to $1,152 billion. According to the simple quantity theory of money, the price level will decline by __________ percent.

Accepted Answer

A)  4.00
B)  3.33
C)  5.09
D)  4.17

Question 4

The simple quantity theory of money can be written as

Accepted Answer

A)  P = MV/Q.
B)  MV = Q/P.
C)  PM = VQ.
D)  Q = PMV.
E)  all of the above

Question 5

Which of the following is consistent with the equation of exchange?

Accepted Answer

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

Question 6

Between 1890 and 1914, the gold stock of the world _______________ and world prices (in general)

Accepted Answer

A)  doubled; increased.
B)  tripled; increased.
C)  rose by 50%; increased.
D)  doubled; decreased.
E)  tripled; decreased.

Question 7

Can a one-time increase in the supply of money cause one-shot inflation?

Accepted Answer

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.

Question 8

According to the equation of exchange, if Real GDP is $3 trillion and the money supply is $0.5 trillion, then velocity

Accepted Answer

A)  must be 6.
B)  must be 1/6.
C)  must be 4 trillion.
D)  must be 1/4 trillion.
E)  cannot be determined without knowing what the price level is.

Question 9

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 ______________________.

Accepted Answer

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

Question 10

Which of the following statements is false?

Accepted Answer

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.

Question 11

Based upon the equation of exchange, which of the following (ceteris paribus)  is most likely to bring about inflation?

Accepted Answer

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

Question 12

The assumption made about Real GDP in the simple quantity theory of money produces a ____________________ curve in the AD-AS version of the theory.

Accepted Answer

A)  horizontal AD
B)  vertical AD
C)  horizontal AS
D)  vertical AS

Question 13

An increase in the expected inflation rate results in an increase in the real interest rate.

Accepted Answer

A) True 
 B)False

Question 14

If the nominal interest rate is 7 percent and the expected inflation rate is 2 percent, the real interest rate is

Accepted Answer

A)  3 percent.
B)  5 percent.
C)  4 percent.
D)  1.50 percent.
E)  0.25 percent.

Question 15

Some economists argue that increases in government spending are not a likely source of continued inflation because

Accepted Answer

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

Question 16

A change in the interest rate resulting from a change in the supply of loanable funds is called the expectations effect.

Accepted Answer

A) True 
 B)False

Question 17

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.

Accepted Answer

A) True 
 B)False

Question 18

If Real GDP is $7,000, the money supply is $5,600, and the price level is 4, then velocity is

Accepted Answer

A)  2.50.
B)  3.33.
C)  4.00.
D)  5.00.
E)  none of the above

Question 19

When Milton Friedman said that inflation is always and everywhere a monetary phenomenon, he was referring to

Accepted Answer

A)  one-shot inflation
B)  supply-induced inflation
C)  continued inflation
D)  hyperinflation (high rates of inflation) 
E)  all kinds of inflation

Question 20

The money supply falls from $900 billion to $850 billion. According to the simple quantity theory of money, the price level will ___________ by __________ percent.

Accepted Answer

A)  rise; 5.6
B)  fall; 5.6
C)  rise; 6.2
D)  fall; 6.2

Exam 14: Money and the Economy

The money supply falls from $900 billion to $850 billion. According to the simple quantity theory of money, the price level will ___________ by __________ percent.

Correct AnswerverifiedShow Answer

An increase in the expected inflation rate results in an increase in the real interest rate.

Correct AnswerverifiedShow Answer

Which of the following statements is false?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

A change in the interest rate resulting from a change in the supply of loanable funds is called the expectations effect.

Correct AnswerverifiedShow Answer

Some economists argue that increases in government spending are not a likely source of continued inflation because

Correct AnswerverifiedShow Answer

List and describe the four positions held by monetarists that help to explain the monetarists view of the economy.

Correct AnswerverifiedMonetarists assume that velocity changes...View AnswerShow Answer

Can a one-time increase in the supply of money cause one-shot inflation?

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

Between 1890 and 1914, the gold stock of the world _______________ and world prices (in general)

Correct AnswerverifiedShow Answer

Which of the following is consistent with the equation of exchange?

Correct AnswerverifiedShow Answer

The simple quantity theory of money can be written as

Correct AnswerverifiedShow Answer

If the nominal interest rate is 7 percent and the expected inflation rate is 2 percent, the real interest rate is

Correct AnswerverifiedShow Answer

Based upon the equation of exchange, which of the following (ceteris paribus) is most likely to bring about inflation?

Correct AnswerverifiedShow Answer

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 ______________________.

Correct AnswerverifiedShow Answer

The assumption made about Real GDP in the simple quantity theory of money produces a ____________________ curve in the AD-AS version of the theory.

Correct AnswerverifiedShow Answer

When Milton Friedman said that inflation is always and everywhere a monetary phenomenon, he was referring to

Correct AnswerverifiedShow Answer

According to the equation of exchange, if Real GDP is $3 trillion and the money supply is $0.5 trillion, then velocity

Correct AnswerverifiedShow Answer

If Real GDP is $7,000, the money supply is $5,600, and the price level is 4, then velocity is

Correct AnswerverifiedShow Answer

The money supply falls from $1,200 billion to $1,152 billion. According to the simple quantity theory of money, the price level will decline by __________ percent.

Correct AnswerverifiedShow Answer

The money supply falls from $900 billion to $850 billion. According to the simple quantity theory of money, the price level will _ by percent.

Correct Answer
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Monetarists assume that velocity changes...
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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 __________.

Correct Answer
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