Deck 18: Alternative Views in Macroeconomics

Question 1

The velocity of money is

A)the number of times a dollar bill exchanges hands in a year.
B)the ratio of deposits to money supply.
C)the number of times the Fed increases money supply in a year.
D)the relationship between money supply and money demand.

Answer 1

A

Question 2

Keynesians believe the economy can be managed using monetary and fiscal policy.

Answer 2

True

Question 3

Keynesian economics includes the idea that

A)economic policies are ineffective.
B)the economy is basically stable.
C)prices adjust to clear the markets.
D)labor markets don't always clear due to wage rigidities.

Answer 3

D

Question 4

Keynesians believe that government policies can improve economic performance.

Question 5

Suppose that the stock of money is $150 billion and nominal GDP is $750 billion.The velocity of money is

A)4.
B)5.
C)16.7.
D)600.

Question 6

The ratio of nominal GDP to the stock of money is the

A)money multiplier.
B)velocity of money.
C)real GDP.
D)GDP deflator.

Question 7

If nominal GDP is $400 billion and the money supply is $50 billion,the velocity of money is

A)0.125.
B)8.
C)12.
D)20.

Question 8

A velocity of 6 means money changes hands,on average,every

A)6 years.
B)6 months.
C)2 months.
D)1/6 of a month.

Question 9

A velocity of ________ means money changes hands,on average,every 4 months.

A)0.25
B)1.25
C)3
D)4

Question 10

Many economists challenged the idea of activist government intervention in the economy following the

A)inflation of the 1970s and early 1980s.
B)recession of 1974-1975.
C)recession of 1980-1982.
D)all of the above

Question 11

Who wrote the General Theory of Employment,Interest,and Money?

A)Adam Smith
B)David Ricardo
C)Milton Friedman
D)John Maynard Keynes

Question 12

Keynesians believe that the economy will never will reach a full employment equilibrium.

Question 13

Which of the following schools of economic thought will recommend an expansionary fiscal policy to reduce the unemployment rate?

A)the monetary schools
B)the classical school
C)the Keynesian school
D)the rational expectation school

Question 14

Many economists challenged the idea of passive government involvement in the economy following the inflation of the 1970s and early 1980s,and the recessions of 1974-1975 and 1980-1982.

Question 15

The velocity of money is 4.If nominal GDP is $1,200 billion then the stock of money

A)is $300 billion.
B)is $400 billion.
C)is $500 billion.
D)is $4,800 billion.

Question 16

Keynes believed which of the following?

A)The government has a role to play in fighting inflation,but not in fighting unemployment.
B)The government has a role to play in fighting unemployment,but not in fighting inflation.
C)The government does not have a role to play in fighting inflation or unemployment.
D)The government has a role to play in fighting inflation and unemployment.

Question 17

The velocity of money is the ratio of

A)real GDP to the stock of money.
B)the overall price level to the stock of money.
C)nominal GDP to the stock of money.
D)nominal GDP to the overall price level.

Question 18

If the stock of money is $60 billion,velocity is 5,and real output is $100 billion,what is the price level?

A)0.12
B)1.4
C)3
D)6

Question 19

Among the propositions of the Keynesian school of thought is

A)economic policies are ineffective.
B)aggregate supply management is the key to a stable economy.
C)aggregate demand determines equilibrium output.
D)rational expectations.

Question 20

Lowering taxes is a contractionary Keynesian policy.

Question 21

Empirical evidence suggests that from 1960 until 2007,the velocity of money had,on average,been

A)constant.
B)decreasing.
C)rising.
D)fluctuating around zero.

Question 22

Assume that the demand for money depends on the interest rate.A decrease in the money supply will cause

A)the interest rate to increase,the quantity demanded of money to decrease,and the velocity of money to decrease.
B)the interest rate to increase,the quantity demanded of money to decrease,and the velocity of money to increase.
C)the interest rate to decrease,the quantity demanded of money to decrease,and the velocity of money to increase.
D)the interest rate to decrease,the quantity demanded of money to increase,and the velocity of money to decrease.

Question 23

If real output is $25 billion,the price level is 5,and velocity is 5,what is the stock of money?

A)$1 billion
B)$10 billion
C)$25 billion
D)$625 billion

Question 24

If the equation for the quantity theory of money is looked on as a demand-for-money equation,then the demand for money depends on

A)nominal income but not on the interest rate.
B)nominal income and the interest rate.
C)real income but not on the interest rate.
D)real income and the interest rate.

Question 25

The quantity theory of money can be written as

A)MV = PY.
B)M/V = PY.
C)MV = P/Y.
D)MP = VP.

Question 26

If the demand for money depends on the interest rate,velocity is

A)not constant,and the quantity theory of money does hold.
B)not constant,and the quantity theory of money does not hold.
C)constant,and the quantity theory of money does not hold.
D)constant,and the quantity theory of money does hold.

Question 27

If the demand for money depends on the interest rate,then a 15% increase in the money supply will increase

A)nominal GDP by 15%.
B)nominal GDP by less than 15%.
C)nominal GDP by more than 30%.
D)real GDP by 30%.

Question 28

If income is $20 billion,the price level is 5,and the stock of money is $10 billion,what is the income velocity of money?

A)0.4
B)2.5
C)4
D)10

Question 29

If income is $30 billion,the price level is 3,and the stock of money is $18 billion,what is the velocity of money?

A)1.4
B)1.8
C)5
D)180

Question 30

If the stock of money is $100 billion,velocity is 4,and the price level is 5,what is income?

A)$5 billion
B)$80 billion
C)$125 billion
D)$2,000 billion

Question 31

If the stock of money is $250 billion,velocity is 5,and the price level is 10,what is real output?

A)$5 billion
B)$125 billion
C)$500 billion
D)$12,500 billion

Question 32

Velocity is NOT constant if

A)the money supply does not depend on the interest rate.
B)the supply of money depends on the interest rate.
C)the price level increases as aggregate output increases.
D)the demand for money depends on the interest rate.

Question 33

Which of the following is assumed constant in the quantity theory of money?

A)money supply
B)velocity
C)the price level
D)output

Question 34

The quantity theory of money implies that a 3% increase in the money supply will eventually cause

A)a 3% increase in real GDP.
B)a 3% increase in disposable income.
C)a 3% increase in the price level.
D)a 3% decrease in the unemployment rate.

Question 35

Velocity will be constant if the demand for money with respect to the interest rate is

A)unitary elastic.
B)perfectly inelastic.
C)perfectly elastic.
D)elastic,but not perfectly elastic.

Question 36

If real output is $10 billion,the price level is 3,and velocity is 6,what is the stock of money?

A)$1.8 billion
B)$5 billion
C)$19 billion
D)$180 billion

Question 37

Which of the following statements is NOT consistent with the quantity theory of money?

A)The velocity of money can be affected by how frequently workers are paid.
B)The velocity of money can be affected by the development of new financial instruments,such as interest-bearing checking accounts.
C)The velocity of money can be affected by the manner in which the banking system clears transactions between banks.
D)Velocity can change with changes in the interest rate.

Question 38

Which of the following is TRUE?

A)Measuring money supply using M2 reduces fluctuations in velocity.
B)Measuring money supply using M1 reduces fluctuations in velocity.
C)Measuring money supply using M2 increases fluctuations in velocity.
D)Velocity does not depend on which money supply measurement we use.

Question 39

According to the quantity theory of money,nominal GDP will double if the money supply is

A)reduced by one-half.
B)reduced threefold.
C)doubled.
D)tripled.

Question 40

If the stock of money is $40 billion,velocity is 3,and real output is $60 billion,what is the price level?

A)0.5
B)2
C)2.5
D)4

Question 41

Monetarists believe

A)the economy is stable.
B)the economy is rigid.
C)the economy does not equilibrate quickly.
D)the economy is unstable.

Question 42

According to supply-side economics,the government needs to focus on policies to

A)stimulate demand.
B)decrease demand.
C)stimulate supply.
D)decrease supply.

Question 43

A monetarist would advocate decreasing the growth rate of money supply during a recession.

Question 44

The velocity of money is the number of times a dollar bill changes hands,on average,during a year.

Question 45

The leading spokesman for monetarism over the last few decades was

A)John Kenneth Galbraith.
B)Milton Friedman.
C)Robert E.Lucas.
D)Paul Samuelson.

Question 46

Monetarists believe that the underlying economy is stable.

Question 47

Monetarists argue that the money supply should

A)grow at a rate equal to the average growth of real output.
B)grow at a rate slower than the average growth of real output.
C)grow at a rate greater than the average growth of real output.
D)be held constant over the business cycle.

Question 48

Monetarists and Keynesians

A)disagree on the speed at which wages change.
B)agree on the impact of fiscal policy on the economy.
C)disagree on how the Fed changes money supply.
D)agree on the usefulness of discretionary policy.

Question 49

Fluctuations in velocity tend to increase when measured using M1 instead of M2.

Question 50

Which of the following would be considered a supply-side policy?

A)an increase in the minimum wage that would cause consumer spending to increase
B)an increase in government spending that would lead to increased aggregate demand
C)investment tax credits for businesses to encourage investment
D)a decrease in the growth of the money supply

Question 51

The Fed increases money supply.In this case,the time lag problem of monetary policy may

A)increase the velocity of money in the short run.
B)increase real GDP in the short run.
C)decrease the velocity of money in the short run.
D)none of the above

Question 52

Monetarists believe that real output is determined by

A)government spending.
B)the rate of growth of the money supply.
C)government planning.
D)aggregate supply.

Question 53

If nominal GDP is $500 billion,velocity is $500 billion divided by the stock of money.

Question 54

Most empirical data support the idea that money demand depends on the interest rate.

Question 55

If nominal GDP is $200 billion and the stock of money is $40 billion,the velocity is 5.

Question 56

A velocity of 4 means money stays with each owner for an average of 4 years.

Question 57

A monetarist would advocate ________ money supply during recessions and ________ money supply during periods of high inflation.

A)increasing; increasing
B)decreasing; increasing
C)increasing; decreasing
D)none of the above

Question 58

The quantity theory of money assumes the velocity of money is constant.

Question 59

Most monetarists advocate an activist monetary stabilization policy.

Question 60

It is difficult to test whether the velocity of money is constant over time because

A)there has been very little variation in the money supply over time.
B)there may be a time lag between a change in the money supply and its effects on nominal GDP.
C)there is only one definition of the money supply.
D)it is difficult to measure the value of nominal GDP over time.

Question 61

Refer to the information provided in Figure 18.3 below to answer the questions that follow.
Figure 18.3
Refer to Figure 18.3.At point B

A)an increase in tax rates will increase tax revenue.
B)a decrease in tax rates will increase tax revenue.
C)any change in tax rates will decrease tax revenue.
D)any change in tax revenue will increase tax revenue.

Question 62

According to the Laffer curve,as tax rates increase,tax revenues

A)initially increase and then decrease.
B)decrease continuously.
C)initially decrease and then increase.
D)rise continuously.

Question 63

According to the Laffer curve,an increase in the tax rate may decrease tax revenues.

Question 64

The Economic Recovery Tax Act of 1981 allowed firms to depreciate their capital at a very rapid rate for tax purposes.This

A)increased the tax liability of firms and discouraged them from investing.
B)decreased tax liability and encouraged investment.
C)increased the tax liability of firms and encouraged them to invest.
D)decreased tax liability and discouraged investment.

Question 65

Refer to the information provided in Figure 18.3 below to answer the questions that follow.
Figure 18.3
Refer to Figure 18.3.The tax rate that will maximize tax revenue is associated with point

A)A.
B)B.
C)C.
D)D.

Question 66

According to the Laffer curve,if the economy is on the positively sloped section of the curve,then

A)both an increase and a decrease in tax rates will increase tax revenue.
B)a decrease in the tax rate will increase tax revenue.
C)an increase in the tax rate will increase tax revenue.
D)both an increase and a decrease in tax rates will decrease tax revenues.

Question 67

Refer to the information provided in Figure 18.3 below to answer the questions that follow.
Figure 18.3
Refer to Figure 18.3.A decrease in tax rates will definitely decrease tax revenue if the economy is at a point such as ________ on the Laffer Curve.

A)A
B)B
C)C
D)both A and B

Question 68

Traditional macroeconomic models assume that people's expectations of inflation

A)are determined by looking at all the relevant information and forecasting the future inflation rate.
B)will be zero in the future.
C)are set by assuming a continuation of present inflation.
D)are set by merely guessing what the future inflation rate will be.

Question 69

The new classical theoretical critique of the existing macroeconomic models is based on

A)the way people form their expectations.
B)the nature of the tradeoff between inflation and growth.
C)wages and labor market equilibrium.
D)the link between the money market and the goods market.

Question 70

Nearly $2 trillion was added to the national debt between 1983 and 1992.

Question 71

Supply side economists think the equilibrium output is determined by the supply of money.

Question 72

According to the Laffer curve,

A)an increase in tax rates will always increase tax revenues.
B)a decrease in tax rates will always decrease tax revenues.
C)a decrease in tax rates will always increases tax revenues.
D)an increase in tax rates will have an inconsistent effect on tax revenues.

Question 73

Refer to the information provided in Figure 18.3 below to answer the questions that follow.
Figure 18.3
Refer to Figure 18.3.A cut in tax rates will decrease tax revenue if the economy moves from Point

A)A to B.
B)B to A.
C)C to B.
D)A to D.

Question 74

The curve that assumes that there is some tax rate beyond which the supply response is large enough to lead to a decrease in tax revenue for further increases in the tax rate is the

A)aggregate supply curve.
B)Lucas supply curve.
C)aggregate production function.
D)Laffer curve.

Question 75

The Economic Recovery Tax Act of 1981 cut corporate taxes in a way that was designed to

A)encourage firms to hire more workers.
B)stimulate capital investment.
C)encourage firms to use fewer nonrenewable resources.
D)reduce corporate profits.

Question 76

Reduction of government regulation is a stimulative aggregate supply policy.

Question 77

The implicit assumption behind the Economic Recovery Tax Act of 1981,which cut the individual income tax rate by 25% over three years,was that

A)the economy was on the negatively sloped portion of the Laffer curve.
B)the economy was on the positively sloped portion of the Laffer curve.
C)tax rate reductions will stimulate demand in the economy and move the economy to full employment.
D)tax rate reductions will decrease supply in the economy and therefore choke off the high rate of inflation that the economy was experiencing.

Question 78

According to supply-side economists,as tax rates are reduced,labor supply should increase.This implies that

A)the income effect of a wage change is greater than the substitution effect of a wage change.
B)the substitution effect of a wage change is greater than the income effect of a wage change.
C)there is no income effect when tax rates are changed.
D)there is no substitution effect when tax rates are changed.

Question 79

If tax rates are cut so that people have an increased incentive to work and businesses have an increased incentive to invest,

A)aggregate supply will increase,aggregate output will increase,and the price level will increase.
B)aggregate supply will increase,aggregate output will increase,and the price level will decrease.
C)both aggregate supply and demand will increase,aggregate output will increase,and the price level will increase.
D)aggregate supply will increase,aggregate demand will decrease,aggregate output will increase,and the price level will decrease.

Question 80

The Laffer curve shows the relationship between the tax rate and the inflation rate.