Question 1

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 = PQ, where M is the money supply, V is the velocity of money, P is the price level, and Q is the quantity of goods and services exchanged. Therefore, the velocity of money is a component of the equation of exchange. Consumption, investment, and the interest rate are not explicitly included in the formula, although changes in them can indirectly affect the variables in the equation.

Question 2

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 in the equation of exchange represents the velocity of money, which is defined as the number of times per year that the average dollar is spent.

Question 3

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 can be calculated as the ratio of nominal GDP to the money supply. However, in this case, we do not have the nominal GDP. Instead, we can use the equation M x V = P x Y, where M is the money supply, V is the velocity of money, P is the price level, and Y is real GDP.

We know that the household spends $24,000 per year and holds a money balance of $6,000. Therefore, the money supply (M) for this household is $30,000 ($24,000 + $6,000).

We do not know the price level or real GDP, but we can assume that they are constant. Therefore, we can set P x Y to 1.

So, M x V = 1, and V = 1/M = 1/30,000.

Simplifying this, we get V = 1/4, which means that the household's money changes hands (is spent) 4 times per year, on average. Therefore, the correct choice is C.

Question 4

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

The answer of The mainstream view is that macro instability...

Question 5

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 in the stability of velocity of money, which means that changes in the money supply have predictable effects on the economy. They also argue that prices and wages are relatively inflexible, which affects the short run impact of monetary policy. Monetarists do not typically advocate for active fiscal policy, as they believe that monetary policy is a more effective tool for stabilizing the economy. However, they do advocate for a rules-based monetary policy approach, rather than discretionary policy decisions.

Question 6

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 7

According to mainstream macroeconomists,U.S.macro instability has resulted from:
A) investment "booms" and "busts" and,occasionally,adverse aggregate supply shocks.
B) adherence by the Fed to a monetary rule.
C) government's attempts to balance its budget.
D) wide fluctuations in net exports.

Accepted Answer

Mainstream macroeconomists argue that U.S. macro instability primarily results from investment "booms" and "busts," as well as occasional adverse aggregate supply shocks. This view is based on the recognition that the business cycle is a central feature of market economies and that fluctuations in investment spending are a key source of economic fluctuations. While government policies and external factors such as net exports can also affect the economy, these factors are seen as secondary to the underlying dynamics of investment cycles.

Question 8

At the equilibrium level of GDP:
A) MV = nominal GDP.
B) MV = real GDP.
C) M = nominal GDP.
D) V = 1/MPS.

Accepted Answer

At the equilibrium level of GDP, the quantity of money (M) in the economy is equal to the price level (P) multiplied by the level of real output (Y), hence MV = PY. As nominal GDP (which is also equal to PY) measures the total value of goods and services produced in an economy at current prices, choice A is correct.

Question 9

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

Accepted Answer

The answer of The velocity of money is equal to:
A)...

Question 10

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 is that changes in investment, particularly changes in business investment, can shift the aggregate demand curve and cause changes in real GDP. This is typically referred to as the business cycle, where periods of economic expansion are followed by periods of contraction. While changes in money supply and technology/resource availability can also have an effect on macro instability, they are not typically viewed as the primary drivers. The idea that bursts of innovation can lead to unsustainable growth and eventual recession is not a mainstream view, but rather a theory put forth by some economists.

Question 11

According to monetarists:
A) changes in the money supply are the primary cause of changes in the price level.
B) an expansionary fiscal policy will lower interest rates and overstimulate the economy.
C) changes in the velocity of money are more important than changes in the money supply in causing the level of economic activity to change.
D) the supply of money changes in response to changes in the levels of real output and prices.

Accepted Answer

Monetarists believe that changes in the money supply are the primary cause of changes in the price level. They argue that if the money supply increases faster than the growth of output, inflation will result, while if the money supply grows slower than output, deflation will occur. Therefore, controlling the money supply is seen as the primary tool for avoiding inflation and maintaining price stability.

Question 12

The equation of exchange indicates that:
A) MV = PQ.
B) other things equal,an increase in the demand for money will increase P and/or Q.
C) the velocity and the supply of money vary directly with one another.
D) MP = VQ.

Accepted Answer

The equation of exchange, also known as the quantity theory of money, is expressed as MV = PQ, where M is the quantity of money, V is the velocity of money, P is the price level, and Q is the real output of goods and services. This equation shows that the total amount of money spent (MV) must equal the total value of goods and services produced (PQ). Therefore, the correct answer is A. Choices B, C, and D are not supported by the equation of exchange.

Question 13

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 is the number of times per year the average dollar is spent on final goods and services. It measures the rate at which money is exchanged in the economy.

Question 14

The basic equation of monetarism is: A) MV = PQ. B) S_a + T + M = I_g + G + X_n. C) V = M/PQ. D) C_a + I_g + X_n + G = GDP.

Accepted Answer

The basic equation of monetarism is MV = PQ, which states that the total amount of money spent in the economy (MV) is equal to the total value of goods and services produced (PQ). This equation is the foundation of monetarist theory, which emphasizes the role of the money supply in shaping economic outcomes.

Question 15

In the equation of exchange,the level of aggregate expenditures is indicated by:
A) MV.
B) MV/Q.
C) PM.
D) MV/P.

Accepted Answer

The level of aggregate expenditures is indicated by MV in the equation of exchange.

Question 16

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 measures how many times a dollar is spent on final goods and services in a year. It is calculated by dividing nominal GDP by the money supply. Therefore, choice D is the correct answer.

Question 17

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

According to the equation of exchange, MV = PY, where M is the money supply, V is velocity of money, P is the price level and Y is real output. Therefore, changes in the money supply will affect both the price level and real output.

Question 18

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, which emphasizes the role of the money supply and the importance of central bank policies in controlling inflation and influencing economic growth. Friedman argued that excessive government intervention in the economy could lead to inflation and lower productivity, and he advocated for a more limited role for government in economic affairs.

Question 19

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 answer of The velocity of money is equal to:
A)...

Question 20

The equation underlying the mainstream view of macroeconomics is: A) MV = PQ. B) C_a + I_g + X_n + G = GDP. C) S = a - bY. D) GDP = P × Q.

Accepted Answer

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

Quiz 38: Current Issues in Macro Theory and Policy

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

In the equation of exchange,V indicates the:

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 mainstream view is that macro instability is caused by:

Monetarists believe that:

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

According to mainstream macroeconomists,U.S.macro instability has resulted from:

At the equilibrium level of GDP:

The velocity of money is equal to:

The mainstream view of macro instability is that:

According to monetarists:

The equation of exchange indicates that:

The velocity of money is the:

The basic equation of monetarism is:

In the equation of exchange,the level of aggregate expenditures is indicated by:

The velocity of money measures the:

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

Economist Milton Friedman is most closely associated with:

The velocity of money is equal to:

The equation underlying the mainstream view of macroeconomics is: