Question 1

Most monetarists blame much of the instability in the economy on

Accepted Answer

Monetarists believe that the government's monetary policy, specifically the manipulation of the money supply, is the primary cause of economic instability. They argue that excessive expansion of the money supply leads to inflation and that restrictive monetary policies lead to economic downturns.

Question 2

If the demand for money depends on the ________ and the velocity is not constant, then the quantity theory of money ________.

Accepted Answer

The quantity theory of money assumes a constant velocity and that money demand is primarily a function of GDP. If money demand depends on the interest rate and velocity is not constant, the theory does not hold.

Question 3

Monetarists argue that ________ should grow at a rate equal to the average growth of real output.

Accepted Answer

Monetarists believe that the money supply should grow at a rate equal to the average growth of real output to maintain stable prices and avoid inflation or deflation.

Question 4

If the demand for money depends on the interest rate, then a ________ in the money supply will increase nominal GDP by ________.

Accepted Answer

According to the quantity theory of money, an increase in the money supply will lead to an increase in aggregate demand, which in turn will increase nominal GDP. However, the extent to which nominal GDP increases depends on the responsiveness of the demand for money to changes in the interest rate. If the demand for money is very sensitive to changes in the interest rate, then a given increase in the money supply will lead to a smaller increase in nominal GDP. On the other hand, if the demand for money is relatively insensitive to changes in the interest rate, then a given increase in the money supply will lead to a larger increase in nominal GDP. Therefore, it is likely that an increase in the money supply will increase nominal GDP by less than 5%, but more than 0%. B is the closest option to this scenario.

Question 5

Monetarists believe that the underlying economy is stable.

Accepted Answer

Monetarists believe that the underlying economy is stable in the long run and that it is the role of the central bank to control the money supply to maintain price stability and prevent inflation.

Question 6

Velocity will be ________ if the demand for money with respect to the interest rate is perfectly elastic.

Accepted Answer

When the demand for money with respect to the interest rate is perfectly elastic, it implies that any change in the interest rate does not affect the quantity of money demanded. In this scenario, velocity, which is the rate at which money circulates in the economy, remains constant because changes in interest rates do not influence the demand for money, and hence, the speed at which money circulates does not change.

Question 7

________ believe that real output is determined by aggregate supply.

Accepted Answer

Monetarists believe that real output is determined by the aggregate supply of goods and services in the economy, rather than by the level of aggregate demand. They argue that changes in money supply can have a significant impact on the output level in the short run, and that the long-run aggregate supply is largely determined by the productivity of the economy's resources.

Question 8

Assume that the demand for money depends on the interest rate. An increase in the money supply will cause the interest rate to ________, the quantity demanded of money to ________, and the velocity of money to ________.

Accepted Answer

The answer of Assume that the demand for money depends...

Question 9

The velocity of money ________ be affected by how frequently workers are paid, and ________ be affected by the development of new financial instruments, such as interest-bearing checking accounts.

Accepted Answer

The velocity of money can indeed be affected by how frequently workers are paid, as more frequent payments may increase the speed at which money circulates in the economy. Additionally, the development of new financial instruments, like interest-bearing checking accounts, can also affect the velocity of money by changing how people choose to hold and spend their money.

Question 10

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

Accepted Answer

Fluctuations in velocity tend to increase when measured using M1 instead of M2 because M1 is more sensitive to high-frequency changes in velocity than M2.

Question 11

If the money supply is measured using ________, fluctuations in velocity are ________.

Accepted Answer

The velocity of money tends to fluctuate more when the money supply is measured using M1 rather than M2. M1 is a narrower measure of the money supply, including only the most liquid forms of money (e.g., cash and checking deposits). M2 includes M1 plus less liquid forms of money, such as savings deposits and money market funds. Because M2 includes a broader range of assets, it tends to be more stable, and thus, fluctuations in velocity are increased when focusing on M1.

Question 12

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

Accepted Answer

Monetarists believe that the money supply should be kept stable over the long term, and that changes in the money supply do not have a significant effect on real economic variables like output and employment. Therefore, they would not advocate for decreasing the growth rate of money supply during a recession. Rather, they would advocate for keeping a stable growth rate of money supply throughout the business cycle.

Question 13

Monetarists and Keynesians ________ on the impact of fiscal policy on the economy.

Accepted Answer

Monetarists and Keynesians have fundamentally different views on how the economy works, so they often disagree on the effectiveness of fiscal policy. Monetarists believe that monetary policy, such as controlling the money supply, is the most effective way to stabilize the economy. Keynesians, on the other hand, believe that government intervention through fiscal policy, such as increasing government spending during a recession, is necessary to stabilize the economy. Therefore, they would disagree on the impact of fiscal policy on the economy.

Question 14

Over the past few decades, Milton Friedman was the leading spokesman for

Accepted Answer

Milton Friedman was the leading spokesman for monetarism, which emphasizes the importance of controlling the money supply to stabilize the economy. He argued that inflation is always and everywhere a monetary phenomenon and therefore the key to controlling inflation is to control the growth rate of the money supply.

Question 15

In the fourth quarter of 2014, the value of the velocity of money in the United States was approximately

Accepted Answer

The velocity of money is a measure of the rate at which money is exchanged in an economy. In the fourth quarter of 2014, the velocity of M2 money stock in the United States was approximately 5.3, according to data from the Federal Reserve.

Question 16

If the equation for the ________ is looked on as a demand-for-money equation, then the demand for money depends on nominal income but not the interest rate.

Accepted Answer

The quantity theory of money states that the demand for money is directly proportional to nominal income, thus nominal income is a determinant of the demand for money. The theory also posits that changes in the money supply have a proportional effect on prices, so changes in the interest rate are not a significant determinant of the demand for money in this framework.

Question 17

Because there may be a time lag between a change in the money supply and its effects on nominal GDP, it is ________ to test whether the velocity of money is constant over time.

Accepted Answer

The time lag between a change in the money supply and the effects on nominal GDP makes it difficult to test whether the velocity of money is constant over time. This is because it is hard to isolate the impact of changes in money velocity from other economic factors that may be affecting GDP at the same time.

Question 18

Most monetarists ________ advocate expanding the money supply during bad times and ________ advocate slowing the growth of the money supply during good times.

Accepted Answer

The answer of Most monetarists ________ advocate expanding the money...

Question 19

The leading spokesperson for monetarism was

Accepted Answer

Milton Friedman is considered the leading spokesperson for monetarism, which emphasizes the role of the money supply in the economy and advocates for a stable and predictable growth rate in the money supply to achieve long-term economic stability. Keynesian economics, on the other hand, emphasizes the role of government intervention in the economy during times of economic downturns. Arthur Laffer is known for the Laffer Curve, which illustrates the relationship between tax rates and government revenue. Ronald Reagan was a proponent of supply-side economics, which emphasizes cutting taxes to stimulate economic growth.

Question 20

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

Accepted Answer

The answer of The Fed decreases money supply. In this...

Quiz 17: Alternative Views in Macroeconomics