Question 1

The quantity theory of money states that if the velocity of money is stable or at least predictable, then _____
A) the quantity of money in circulation determines real GDP in the short run.
B) the quantity of money in circulation determines aggregate spending.
C) the quantity of money in circulation determines both real GDP and the price level in the long run.
D) the quantity of money in circulation determines only the price level in the long run.
E) the quantity of money in circulation determines the potential output in the long run.

Accepted Answer

The quantity theory of money, particularly in its classical form, posits that the quantity of money in circulation primarily influences the price level in the long run, assuming velocity is stable or predictable. It does not directly determine real GDP, aggregate spending, or potential output in the long run, but rather influences the general price level of goods and services.

Question 2

In an economy in which velocity of money in circulation is constant and real output grows at an average rate of 3 percent per year, a 5 percent average rate of growth in the money supply would result in a _____
A) constant price level.
B) slowly increasing price level.
C) slowly decreasing price level.
D) stable 4 percent growth in real GDP.
E) stable 4 percent growth in nominal GDP.

Accepted Answer

According to the Quantity Theory of Money (MV = PQ), a constant velocity of money in circulation combined with an increase in the money supply will lead to a proportional increase in the price level. A 5 percent average rate of growth in the money supply in an economy with a 3 percent average rate of growth in real output would lead to a slowly increasing price level.

Question 3

Which of these is most likely to lower the velocity of money?
A) a commercial innovation that facilitates exchange
B) a low inflation rate
C) a decline in the effectiveness of money as a store of wealth
D) a high inflation rate
E) a weekly pay for workers instead of a monthly pay

Accepted Answer

A low inflation rate is most likely to lower the velocity of money because when inflation is low, people are less inclined to spend money quickly, expecting that its value will not erode rapidly over time. This contrasts with high inflation scenarios, where people tend to spend money more quickly to avoid loss of purchasing power, thereby increasing the velocity of money.

Question 4

During the 2007-2009 financial crisis, the Federal Reserve took some unusual steps in its conduct of monetary policy. Which of the following was not one of them?
A) It invested in AIG.
B) It invested more than $1 trillion in mortgage-backed securities.
C) It worked with the U.S. Treasury and with other regulators to stabilize banks and thaw frozen credit lines.
D) It worked with the U.S. Treasury and other regulators to help conduct a stress test of the 19 largest banks.
E) It bailed out General Motors.

Accepted Answer

The Federal Reserve did not bail out General Motors during the financial crisis.

Question 5

The velocity of money is defined as _____
A) the time it takes the average worker to get to the bank with his/her paycheck.
B) the time it takes banks to clear checks.
C) the average number of times per year each dollar is used to purchase final goods and services.
D) the ratio of money supply to the average price level in an economy.
E) the average number of times per year each dollar is spent for goods, payrolls, Social Security payments, etc.

Accepted Answer

The velocity of money is defined as the average number of times per year each dollar is used to purchase final goods and services. It measures how many times money changes hands in a given period of time, indicating the level of economic activity in an economy. Higher velocity means more transactions and a more active economy, while lower velocity means fewer transactions and a slower economy.

Question 6

If real output and velocity are stable and predictable, then the equation of exchange can be used to derive a simple relationship between _____
A) the money supply and the price level.
B) the money supply and the interest rate.
C) the money supply and the foreign exchange rate.
D) unemployment and aggregate demand.
E) unemployment and nominal GDP.

Accepted Answer

The equation of exchange (MV = PQ) shows the relationship between the money supply (M), velocity (V), real output (Q), and the price level (P). If real output and velocity are stable and predictable, this relationship can be used to derive a simple relationship between the money supply and the price level.

Question 7

An increase in the expected inflation rate causes _____
A) the velocity of money to increase.
B) the velocity of money to decrease.
C) the actual inflation rate to fall.
D) the actual price level to decrease.
E) the money supply to increase.

Accepted Answer

An increase in the expected inflation rate can cause individuals to spend their money more quickly before prices rise, leading to an increase in the velocity of money.

Question 8

Which of the following would cause an increase in the velocity of money?
A) an increase in the use of credit cards
B) an increase in the money supply
C) an increase in the demand for money
D) a decrease in the rate of interest
E) a decrease in nominal GDP and a constant money supply

Accepted Answer

An increase in the use of credit cards would lead to a faster circulation of money, thereby increasing the velocity of money. Credit cards enable people to spend money quickly and easily, without the need for physical cash, which can increase the number of transactions and the speed at which money changes hands.

B) An increase in the money supply would have the opposite effect on the velocity of money, as it would lead to a decrease in the demand for money and a decrease in the rate of interest, resulting in slower circulation of money.

C) An increase in the demand for money may lead to an overall decrease in the velocity of money, as people hold on to their cash for longer periods of time.

D) A decrease in the rate of interest may lead to an increase in borrowing, but it may also lead to a decrease in the velocity of money, as people may be less inclined to spend money if they can earn more by saving it.

E) A decrease in nominal GDP and a constant money supply would likely lead to a decrease in the velocity of money, as people may be less inclined to spend money when the overall economy is contracting.

Question 9

Which of the following statements about the velocity of money in the United States is correct?
A) From 1915 to 1947, the velocity of M1 increased.
B) From 1947 to 1973, the velocity of M1 decreased.
C) The growth in the velocity of money was steady in the 1970s.
D) The velocity of money has remained more or less stable post-1980s.
E) ATM machines and credit cards have increased the velocity of money.

Accepted Answer

The answer of Which of the following statements about the...

Question 10

In an economy in which real output grows at an average rate of 3 percent per year, a 7 percent average rate of growth in the money supply would result in a(n) _____
A) inflation rate of 4 percent, if the velocity of money in circulation is constant.
B) inflation rate of -4 percent, if the velocity of money in circulation is constant.
C) $7 increase in the price level each year.
D) $7 decrease in the price level each year.
E) increase in the velocity of money in circulation.

Accepted Answer

The equation of exchange states that MV=PQ, where M is the money supply, V is the velocity of money in circulation, P is the price level, and Q is the quantity of goods and services produced. Assuming that the velocity of money is constant, an increase in the money supply will result in a proportional increase in the price level. Therefore, a 7 percent growth in the money supply would result in a 7 percent increase in the price level, and combined with the 3 percent growth in real output, would lead to an inflation rate of 4 percent (7 percent - 3 percent = 4 percent).

Question 11

Suppose that the demand and supply of money are initially in equilibrium, and that the demand for money increases. A monetary authority interested in keeping the money supply constant and the interest rate low must _____
A) adopt an expansionary monetary policy.
B) adopt a contractionary monetary policy.
C) increase the demand for money.
D) decrease the demand for money.
E) give up pursuing both goals at the same time.

Accepted Answer

The answer of Suppose that the demand and supply of...

Question 12

For interest rates to remain stable during economic expansions, the money supply should _____
A) decrease at a faster rate than the demand for money.
B) grow at the same rate as money demand.
C) grow at a faster rate than money demand.
D) grow at a slower rate than money demand.
E) decrease at a slower rate than the demand for money.

Accepted Answer

When the money supply grows at the same rate as money demand, interest rates are likely to remain stable during economic expansions. This is because the increase in money supply is matched by an increase in demand, leading to a balance in the market. If the money supply grows at a faster rate than money demand, it can lead to inflation and higher interest rates. If the money supply decreases, it can lead to a decrease in economic growth and lower interest rates. Therefore, option B is the best choice.

Question 13

Most policy makers agree that in the long run, changes in the money supply influence _____
A) the price level, inflation, and employment.
B) the real interest rate and aggregate demand.
C) the planned investment expenditure.
D) the exchange rate.
E) the potential GDP and unemployment.

Accepted Answer

Changes in the money supply can be a powerful tool for controlling inflation and promoting employment. An increase in the money supply can lead to higher spending, which in turn can lead to higher prices and ultimately inflation. However, if the increase in spending is used to increase aggregate demand through investment and consumption, it can lead to an increase in output and employment. Similarly, a decrease in the money supply can lead to a decrease in spending and a decrease in prices, but can also lead to a decrease in output and employment. Therefore, most policy makers agree that changes in the money supply influence the price level, inflation, and employment in the long run.

Question 14

The velocity of money increases with a _____, other things constant.
A) fall in the inflation rate
B) rise in the inflation rate
C) rise in the employment rate
D) fall in the exchange rate
E) rise in the real interest rate

Accepted Answer

The velocity of money is defined as the number of times a unit of currency is spent in a given period of time, usually a year. Inflation rate is the rate at which prices of goods and services are rising, which is closely related to the velocity of money. When the inflation rate rises, people tend to spend money faster to avoid rising prices, leading to an increase in the velocity of money. Therefore, a rise in the inflation rate increases the velocity of money.

Question 15

Suppose the money demand curve shifts rightward. Which of the following is true about the alternative policy options available with the Fed?
A) The Fed can keep the interest rate from rising only if it increases the money supply.
B) The Fed cannot prevent the interest rate from rising.
C) The Fed can prevent the interest rate from rising without changing the money supply.
D) If the Fed expands the money supply, the interest rate will rise even further.
E) The Fed should reduce the money supply if it plans to prevent the interest rate from rising.

Accepted Answer

When the money demand curve shifts rightward, it indicates an increase in the demand for money at the existing interest rate. To keep the interest rate from rising in response to this increased demand, the Fed can increase the money supply, which shifts the money supply curve rightward, counterbalancing the increased demand and stabilizing the interest rate.

Question 16

The behavior of the M1 velocity of money in recent years can be explained by _____
A) stability of interest rates.
B) a low and stable rate of inflation.
C) monetary policy that has been successful in stabilizing the economy.
D) financial innovation creating new substitutes for M1 money.
E) a large number of banks and savings and loan associations going bankrupt.

Accepted Answer

The behavior of the M1 velocity of money in recent years can be explained by financial innovation creating new substitutes for M1 money. With the rise of digital and mobile payment systems, traditional M1 money (such as cash and checking accounts) has been supplemented by new substitutes, leading to a decrease in the velocity of M1 money.

Question 17

If the Fed targets the interest rate, then _____
A) the money supply will grow at a more controlled rate.
B) monetary policy will reinforce fluctuations in economic activity.
C) the price level will be more stable in the long run.
D) money demand will be more stable.
E) velocity will be less stable.

Accepted Answer

When the Fed targets the interest rate, it adjusts the money supply to maintain that target rate. This can lead to reinforcing fluctuations in economic activity because in times of economic boom, the Fed might lower interest rates to prevent overheating, which can further boost economic activity, and in times of recession, it might reduce rates to stimulate the economy, potentially leading to more pronounced cycles.

Question 18

A rising rate of inflation _____
A) makes people more willing to hold money as an asset.
B) reduces the usefulness of money as a store of value and thus increases the velocity of money.
C) increases the usefulness of money as a medium of exchange and thus reduces the velocity of money.
D) is usually preceded by a reduction in the money supply.
E) does not have any effect on the velocity of money.

Accepted Answer

When there is a rising rate of inflation, the value of money decreases, and individuals are less likely to hold money as a store of value. This reduces the usefulness of money as a store of value and leads to an increase in the velocity of money.

Question 19

If interest rates are to remain constant, the money supply should change _____
A) in the opposite direction to a change in aggregate demand.
B) in the same direction as a change in money demand.
C) only when investment changes.
D) only when the demand for money decreases.
E) only when the inflation rate changes.

Accepted Answer

If interest rates are to remain constant, the money supply should change in the same direction as a change in money demand. This is because if money demand increases, people need more money to spend and vice versa. To match this demand for money, the central bank can adjust the money supply to ensure interest rates remain stable.

Question 20

In the long run, a change in the money supply does not affect the natural rate of unemployment because _____
A) the aggregate demand curve is vertical.
B) the aggregate demand curve is downward sloping.
C) the long-run aggregate supply curve is vertical.
D) the long-run aggregate supply curve is upward sloping.
E) the long-run aggregate supply curve is horizontal.

Accepted Answer

The natural rate of unemployment is determined by the long-run supply side of the economy, which is represented by the long-run aggregate supply curve. In the long run, changes in the money supply only affect nominal variables, while the real variables remain unchanged. Therefore, the long-run aggregate supply curve is vertical, and changes in the money supply do not affect the natural rate of unemployment.

Quiz 15: Monetary Theory and Policy.

The quantity theory of money states that if the velocity of money is stable or at least predictable, then _____

In an economy in which velocity of money in circulation is constant and real output grows at an average rate of 3 percent per year, a 5 percent average rate of growth in the money supply would result in a _____

Which of these is most likely to lower the velocity of money?

During the 2007-2009 financial crisis, the Federal Reserve took some unusual steps in its conduct of monetary policy. Which of the following was not one of them?

The velocity of money is defined as _____

If real output and velocity are stable and predictable, then the equation of exchange can be used to derive a simple relationship between _____

An increase in the expected inflation rate causes _____

Which of the following would cause an increase in the velocity of money?

Which of the following statements about the velocity of money in the United States is correct?

In an economy in which real output grows at an average rate of 3 percent per year, a 7 percent average rate of growth in the money supply would result in a(n) _____

Suppose that the demand and supply of money are initially in equilibrium, and that the demand for money increases. A monetary authority interested in keeping the money supply constant and the interest rate low must _____

For interest rates to remain stable during economic expansions, the money supply should _____

Most policy makers agree that in the long run, changes in the money supply influence _____

The velocity of money increases with a _____, other things constant.

Suppose the money demand curve shifts rightward. Which of the following is true about the alternative policy options available with the Fed?

The behavior of the M1 velocity of money in recent years can be explained by _____

If the Fed targets the interest rate, then _____

A rising rate of inflation _____

If interest rates are to remain constant, the money supply should change _____

In the long run, a change in the money supply does not affect the natural rate of unemployment because _____