Question 1

Monetarists say that the relationship between the amount of money that households and businesses want to hold and the level of national output and income
A)has decreased historically because of increased accessibility to credit.
B)rises during recession and falls during periods of full employment.
C)falls during recession and rises during periods of full employment.
D)is relatively stable.

Accepted Answer

Monetarists believe that the demand for money is relatively stable and does not vary with changes in national output and income in the long run. They argue that changes in the money supply are the primary driver of changes in the economy.

Question 2

Economist Milton Friedman is most closely associated with
A)Keynesian economics.
B)the rational expectations theory.
C)supply-side economics.
D)monetarism.

Accepted Answer

Milton Friedman is most closely associated with monetarism, a theory that emphasizes the importance of the money supply in affecting economic activity. Friedman argued that controlling the money supply was the most effective way for governments to stabilize the economy and that inflation was primarily a monetary phenomenon.

Question 3

The mainstream view of macro instability is that
A)changes in the money supply directly cause changes in aggregate demand and thus cause changes in real GDP.
B)changes in investment shift the aggregate demand curve and thus cause changes in real GDP.
C)bursts of innovation put the economy on an unsustainable growth path, eventually producing recession.
D)changes in technology and resource availability are the two main sources of fluctuations of real GDP.

Accepted Answer

The mainstream view of macro instability emphasizes that changes in investment can shift the aggregate demand curve, leading to fluctuations in real GDP.

Question 4

The velocity of money is equal to
A)1/MPS.
B)1/reserve ratio.
C)M/GDP.
D)none of these.

Accepted Answer

The velocity of money is calculated as GDP/M, not M/GDP. Therefore, none of the given options correctly define the velocity of money.

Question 5

The velocity of money is equal to
A)1/MPS.
B)nominal GDP/M.
C)1/reserve ratio.
D)nominal GDP/P.

Accepted Answer

The velocity of money is equal to nominal GDP divided by the money supply (M).

Question 6

Answer the question on the basis of the following information for a hypothetical economy.All values are in nominal terms.
M = $100 
V = 2
Ca = $160
Xn = $10
G = $10
Nominal GDP is
A)$100.
B)$200.
C)$180.
D)$50.

Accepted Answer

Nominal GDP can be calculated using the equation of exchange: MV = GDP. Here, M (money supply) is $100 and V (velocity of money) is 2. Therefore, Nominal GDP = $100 * 2 = $200.

Question 7

If M is $400, P is $4, and Q is 300, then V must be
A)1.33.
B)3.
C)5.33.
D)100.

Accepted Answer

V is calculated as P/Q, which is $4/300 = 0.0133. However, none of the options match this calculation directly. The closest option, based on the values given, is B) 3, assuming there might be a misunderstanding in the question or a typo in the options. Without a clear formula linking M, P, Q, and V in the question, the direct calculation of P/Q does not match any of the provided options accurately.

Question 8

In the equation of exchange, V indicates the
A)value or purchasing power of the dollar.
B)number of times per year the average dollar is spent.
C)quantity of real output.
D)reciprocal of the price level.

Accepted Answer

V represents the velocity of money, which is the number of times per year that the average dollar is spent.

Question 9

Monetarists believe that
A)prices and wages are inflexible or sticky.
B)both product and resource markets are monopolistic.
C)velocity is relatively stable.
D)the economy is more stable when active fiscal and monetary policy are used.

Accepted Answer

Monetarists believe that the velocity of money, which is the rate at which money circulates in the economy, is relatively stable. This belief is central to their argument that changes in the money supply have predictable effects on the economy.

Question 10

If the amount of money in circulation is $180 billion and the value of the economy's total output is $540 billion, then the
A)circulation period of money must be one-fourth of a year.
B)velocity of money is 4.
C)average price per final good sold is $3.
D)velocity of money is 3.

Accepted Answer

The velocity of money is calculated by dividing the total output by the money supply. Here, $540 billion / $180 billion = 3.

Question 11

Which of the following is a component of the equation of exchange?
A)consumption
B)the interest rate
C)investment
D)the velocity of money

Accepted Answer

The equation of exchange is MV=PT, where M is the money supply, V is the velocity of money, P is the price level, and T is the level of transactions. Therefore, the velocity of money is a component of the equation of exchange. Consumption, the interest rate, and investment are not explicitly included in this equation.

Question 12

The mainstream view is that macro instability is caused by
A)erratic growth of the nation's money supply.
B)government interference in the economy.
C)significant changes in investment spending.
D)consumption "booms" and "busts."

Accepted Answer

Significant changes in investment spending are often seen as a primary cause of macroeconomic instability, as they can lead to fluctuations in aggregate demand and economic cycles.

Question 13

Answer the question on the basis of the following information for a hypothetical economy.All values are in nominal terms.
M = $100 
V = 2
Ca = $160
Xn = $10
G = $10
If the price level P is 4, Q is
A)50.
B)100.
C)200.
D)500.

Accepted Answer

The equation of exchange is MV = PQ. Given M = $100, V = 2, and P = 4, we can solve for Q:  100 * 2 = 4 * Q  200 = 4Q  Q = 50.

Question 14

The equation of exchange suggests that, if the supply and velocity of money remain unchanged, an increase in the physical volume of goods and services produced will cause
A)the unemployment rate to rise.
B)the Federal Reserve Banks to sell securities in the open market.
C)a decline in the price level.
D)an automatic budget deficit.

Accepted Answer

According to the equation of exchange (MV = PQ), if the money supply (M) and velocity (V) are constant, an increase in the quantity of goods and services (Q) will lead to a decrease in the price level (P) to maintain the equality.

Question 15

Answer the question on the basis of the following information for a hypothetical economy.All values are in nominal terms.
M = $100 
V = 2
Ca = $160
Xn = $10
G = $10
In equilibrium, Ig is
A)$20.
B)$10.
C)$5.
D)$50.

Accepted Answer

In equilibrium, the nominal GDP (Y) is given by the equation MV = Y. Here, M = $100 and V = 2, so Y = $200. The GDP is also the sum of consumption (Ca), investment (Ig), government spending (G), and net exports (Xn). Therefore, $200 = $160 + Ig + $10 + $10. Solving for Ig gives Ig = $20.

Question 16

The equation underlying the mainstream view of macroeconomics is
A)MV = PQ.
B)Ca + Ig + Xn + G = GDP.
C)S = a − bY.
D)GDP = P × Q.

Accepted Answer

The answer of The equation underlying the mainstream view of...

Question 17

The velocity of money is the
A)relationship between the money supply and the price level.
B)number of times per year the average dollar is spent on final goods and services.
C)relationship between asset and transactions demands for money.
D)price level divided by aggregate supply.

Accepted Answer

The velocity of money refers to the frequency at which one unit of currency is used to purchase domestically-produced goods and services within a given time period.

Question 18

According to the equation of exchange, changes in the money supply can affect
A)only the velocity of money.
B)both the price level and real output.
C)only real output and employment.
D)only the price level.

Accepted Answer

The equation of exchange, MV = PQ, states that the money supply (M) multiplied by the velocity of money (V) equals the price level (P) multiplied by real output (Q). Therefore, changes in the money supply can affect both the price level and real output.

Question 19

If a certain household earns and spends $24,000 per year and, on the average, holds a money balance of $6,000, then the velocity of money for this household is
A)6.
B)1/6.
C)4.
D)1/4.

Accepted Answer

The velocity of money is calculated as the ratio of total spending to the average money balance. Here, $24,000 (spending) / $6,000 (money balance) = 4.

Question 20

The velocity of money measures the
A)proportion of the money supply held as an asset.
B)ratio of the transactions demand to the asset demand for money.
C)average annual rate of increase in the money supply.
D)number of times per year the average dollar is spent on final goods and services.

Accepted Answer

The velocity of money refers to the frequency at which one unit of currency is used to purchase domestically-produced goods and services within a given time period.

Quiz 39: Current Issues in Macro Theory and Policy

Monetarists say that the relationship between the amount of money that households and businesses want to hold and the level of national output and income

Economist Milton Friedman is most closely associated with

The mainstream view of macro instability is that

The velocity of money is equal to

The velocity of money is equal to

Answer the question on the basis of the following information for a hypothetical economy.All values are in nominal terms. M = $100 V = 2 Ca = $160 Xn = $10 G = $10 Nominal GDP is

If M is $400, P is $4, and Q is 300, then V must be

In the equation of exchange, V indicates the

Monetarists believe that

If the amount of money in circulation is $180 billion and the value of the economy's total output is $540 billion, then the

Which of the following is a component of the equation of exchange?

The mainstream view is that macro instability is caused by

Answer the question on the basis of the following information for a hypothetical economy.All values are in nominal terms. M = $100 V = 2 Ca = $160 Xn = $10 G = $10 If the price level P is 4, Q is

The equation of exchange suggests that, if the supply and velocity of money remain unchanged, an increase in the physical volume of goods and services produced will cause

Answer the question on the basis of the following information for a hypothetical economy.All values are in nominal terms. M = $100 V = 2 Ca = $160 Xn = $10 G = $10 In equilibrium, Ig is

The equation underlying the mainstream view of macroeconomics is

The velocity of money is the

According to the equation of exchange, changes in the money supply can affect

If a certain household earns and spends $24,000 per year and, on the average, holds a money balance of $6,000, then the velocity of money for this household is

The velocity of money measures the