Question 1

Which of the following characterizes the Monetarist viewpoint?

Accepted Answer

Monetarists believe that changes in the money supply have direct effects on the economy, not just through interest rates and investment, and they do not claim that money never affects investment.

Question 2

Which of the following is a belief of the monetarists?

Accepted Answer

Monetarists believe that poor monetary policy exacerbated the Great Depression, that monetary policy affects the economy through various channels beyond just interest rates and investment, and they often argue that the interest-investment curve is vertical, indicating that investment is not sensitive to interest rates.

Question 3

Starting from equilibrium in the money market, suppose the money supply increases. Other things being equal, this will cause an excess demand for money, leading people to sell bonds.

Accepted Answer

An increase in the money supply would lead to a decrease in the interest rate, which would cause an increase in the demand for bonds. Therefore, people would not sell bonds in response to the increase in the money supply.

Question 4

Which of the following is a reason for the Keynesian view that monetary policy plays a minor role in affecting the economy?

Accepted Answer

Keynesians believe that the investment curve is very steep, meaning that changes in interest rates have little effect on investment spending, thus reducing the effectiveness of monetary policy.

Question 5

Adam Smith listed three types of motives for people holding money--transaction, precautionary, and speculative.

Accepted Answer

Adam Smith did not list these motives; they were identified by John Maynard Keynes in his liquidity preference theory.

Question 6

According to the Monetarist view, the impact of expansionary monetary policy will be:

Accepted Answer

According to the Monetarist view, expansionary monetary policy leads to an increase in the money supply, which increases aggregate demand in the short run. This increase in aggregate demand will lead to higher prices (inflation) in the long run, as the economy adjusts to the new level of output. This effect is regardless of whether the effects of the policy are anticipated or unanticipated. Thus, option C is the correct answer.

Question 7

Most monetarists favor:

Accepted Answer

Monetarists generally favor a constant increase in the money supply equal to the potential annual growth rate in real GDP to promote economic growth and stability. This is known as the monetarist rule, which aims to keep the money supply stable and predictable to avoid inflationary or deflationary shocks to the economy.

Question 8

Which of the following is an important issue in the Keynesian-Monetarist debate?

Accepted Answer

All of the issues mentioned (monetary vs. fiscal policy, transmission mechanism, investment-demand curve) are important points of debate between the Keynesian and Monetarist schools of thought, making option D the correct answer.

Question 9

Monetarists argue that the Federal Reserve should allow the money supply to grow:

Accepted Answer

Monetarists argue that the Federal Reserve should allow the money supply to grow at a constant rate, ideally around 2-3% annually. This consistent increase in the money supply would help to stabilize the economy and avoid sharp ups and downs in economic activity.

Question 10

Bond prices and interest rates are directly related.

Accepted Answer

The answer of Bond prices and interest rates are directly...

Question 11

The opportunity cost of holding money is measured by the rate of interest.

Accepted Answer

The opportunity cost of holding money is the potential return or benefits that could have been earned if the money had been invested or used for other purposes. The rate of interest reflects the potential return that could have been earned by investing the money, and therefore, it measures the opportunity cost of holding money.

Question 12

According to the Monetarists, the primary cause of inflation is:

Accepted Answer

Monetarists believe that inflation is primarily caused by rapid expansion of the money supply. They argue that when the money supply grows more quickly than the economy, the value of money decreases, leading to inflation.

Question 13

When there is an excess demand for money, individuals and businesses will attempt to purchase bonds.

Accepted Answer

When there is an excess demand for money, individuals and businesses will attempt to hold onto their cash reserves rather than investing in bonds. This is because the demand for money is greater than the demand for bonds, causing the price of bonds to decrease and the yield to increase.

Question 14

Which of the following is true ?

Accepted Answer

Keynesians advocate increasing the money supply during economic recessions to stimulate aggregate demand. Monetarists advocate increasing the money supply by a constant rate year after year to control inflation. Keynesians argue that the crowding-out effect is rather insignificant because they believe that fiscal policy is more effective than monetary policy in stimulating aggregate demand. Monetarists argue that the crowding-out effect is rather large because they believe that monetary policy is more effective than fiscal policy in controlling inflation.

Question 15

An increase in the supply of money, other things being equal, will raise the equilibrium interest rate.

Accepted Answer

According to the demand and supply framework for loanable funds, an increase in the supply of money will lead to a decrease in the interest rate. This is because there will be a larger supply of funds available to lend, making it easier and cheaper for borrowers to access credit. Therefore, the statement is false.

Question 16

The opportunity cost of holding money is properly measured by the rate of interest on financial assets such as bonds.

Accepted Answer

Holding money means that one is not investing it in financial assets such as bonds, where it could earn interest. Therefore, the opportunity cost of holding money is the foregone interest that could have been earned on financial assets.

Question 17

Which economic theory argues that changes in velocity are predictable and the crowding-out effect is substantial?

Accepted Answer

Monetarist theory holds that changes in velocity can be predicted and that the crowding-out effect is substantial.

Question 18

Keynesians reject the influence of monetary policy on the economy. One argument supporting this Keynesian view is that the:

Accepted Answer

The answer of Keynesians reject the influence of monetary policy...

Question 19

Monetarists argue that fiscal policy is ineffective because:

Accepted Answer

Monetarists argue that fiscal policy is ineffective because of the crowding-out effect, which reduces investment. This effect occurs when increased government spending leads to higher interest rates, which in turn reduces private investment. While some monetarists may also argue that prices and wages are sticky in the short run, this is not the primary reason why they view fiscal policy as ineffective. They also generally don't argue that the velocity of money is predictable or that fiscal policy causes the value of the dollar to depreciate.

Question 20

John Maynard Keynes listed three types of motives for people holding money--transactions, precautionary, and speculative.

Accepted Answer

This statement is true. Keynes did indeed list the three motives for people holding money as transactions, precautionary, and speculative in his book "The General Theory of Employment, Interest and Money."

Quiz 20: Policy Disputes Using the Self-Correcting Aggregate Demand and Supply Model