Principles of Macroeconomics, 9e tb1 (Case/Fair/Oster)



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Principles of Macroeconomics, 9e - TB1 (Case/Fair/Oster)

Chapter 18



Debates in Macroeconomics: Monetarism, New Classical Theory, and Supply-Side Economics

18.1



Keynesian Economics

1



Multiple Choice

1)



Who wrote the General Theory of Employment, Interest, and Money?

A)



Adam Smith

B)



David Ricardo

C)



Milton Friedman

D)



John Maynard Keynes

Answer:



D

Diff: 1

Topic:



Keynesian Economics

Skill:



Fact

2)



Keynesian economics includes the idea that

A)



economic policies are ineffective.

B)



the economy is basically stable.

C)



prices adjust to clear the markets.

D)



labor markets don't always clear due to wage rigidities.

Answer:



D

Diff: 1

Topic:



Keynesian Economics

Skill:



Fact

3)



Among the propositions of the Keynesian school of thought is

A)



economic policies are ineffective.

B)



aggregate supply management is the key to a stable economy.

C)



aggregate demand determines equilibrium output.

D)



rational expectations.

Answer:



C

Diff: 1

Topic:



Keynesian Economics

Skill:



Fact

4)



Keynes believed which of the following?

A)



The government has a role to play in fighting inflation, but not in fighting unemployment.

B)



The government has a role to play in fighting unemployment, but not in fighting inflation.

C)



The government does not have a role to play in fighting inflation or unemployment.

D)



The government has a role to play in fighting inflation and unemployment.

Answer:



D

Diff: 1

Topic:



Keynesian Economics

Skill:



Fact

5)




Many economists challenged the idea of activist government intervention in the economy following the

A)



inflation of the 1970s and early 1980s.

B)



recession of 1974-1975.

C)



recession of 1980-1982.

D)



all of the above

Answer:



D

Diff: 1

Topic:



Keynesian Economics

Skill:



Fact

2



True/False

1)



Keynesians believe that government policies can improve economic performance.

Answer:



TRUE

Diff: 1

Topic:



Keynesian Economics

Skill:



Fact

2)



Keynesians believe that the economy will never will reach a full employment equilibrium.

Answer:



FALSE

Diff: 1

Topic:



Keynesian Economics

Skill:



Fact

3)



Lowering taxes is a contractionary Keynesian policy.

Answer:



FALSE

Diff: 2

Topic:



Keynesian Economics

Skill:



Definition

4)



Keynesians believe the economy can be managed using monetary and fiscal policy.

Answer:



TRUE

Diff: 1

Topic:



Keynesian Economics

Skill:



Fact

5)



Many economists challenged the idea of passive government involvement in the economy following the inflation of the 1970s and early 1980s, and the recessions of 1974-1975 and 1980-1982.

Answer:



FALSE

Diff: 1

Topic:



Keynesian Economics

Skill:



Fact

18.2




Monetarism

1



Multiple Choice

1)



Which of the following schools of economic thought will recommend an expansionary fiscal policy to reduce the unemployment rate?

A)



the monetary schools

B)



the classical school

C)



the Keynesian school

D)



the rational expectation school

Answer:



C

Diff: 1

Topic:



Monetarism

Skill:



Fact

2)



The ratio of nominal GDP to the stock of money is the

A)



money multiplier.

B)



velocity of money.

C)



real GDP.

D)



GDP deflator.

Answer:



B

Diff: 1

Topic:



Monetarism

Skill:



Definition

3)



The velocity of money is

A)



the number of times a dollar bill exchanges hands in a year.

B)



the ratio of deposits to money supply.

C)



the number of times the Fed increases money supply in a year.

D)



the relationship between money supply and money demand.

Answer:



A

Diff: 1

Topic:



Monetarism

Skill:



Definition

4)



The velocity of money is the ratio of

A)



real GDP to the stock of money.

B)



the overall price level to the stock of money.

C)



nominal GDP to the stock of money.

D)



nominal GDP to the overall price level.

Answer:



C

Diff: 1

Topic:



Monetarism

Skill:



Definition

5)




A velocity of 6 means money changes hands, on average, every

A)



6 years.

B)



6 months.

C)



2 months.

D)



1/6 of a month.

Answer:



C

Diff: 2

Topic:



Monetarism

Skill:



Conceptual

AACSB:



Reflective Thinking

6)



A velocity of ________ means money changes hands, on average, every 4 months.

A)



0.25

B)



1.25

C)



3

D)



4

Answer:



C

Diff: 2

Topic:



Monetarism

Skill:



Conceptual

AACSB:



Reflective Thinking

7)



If nominal GDP is $400 billion and the money supply is $50 billion, the velocity of money is

A)



0.125.

B)



8.

C)



12.

D)



20.

Answer:



B

Diff: 1

Topic:



Monetarism

Skill:



Analytic

AACSB:



Analytic Skills

8)



The velocity of money is 4. If nominal GDP is $1,200 billion then the stock of money

A)



is $300 billion.

B)



is $400 billion.

C)



is $500 billion.

D)



is $4,800 billion.

Answer:



A

Diff: 1

Topic:



Monetarism

Skill:



Analytic

AACSB:



Analytic Skills

9)




Suppose that the stock of money is $150 billion and nominal GDP is $750 billion. The velocity of money is

A)



4.

B)



5.

C)



16.7.

D)



600.

Answer:



B

Diff: 1

Topic:



Monetarism

Skill:



Analytic

AACSB:



Analytic Skills

10)



If the stock of money is $60 billion, velocity is 5, and real output is $100 billion, what is the price level?

A)



0.12

B)



1.4

C)



3

D)



6

Answer:



C

Diff: 2

Topic:



Monetarism

Skill:



Analytic

AACSB:



Analytic Skills

11)



If the stock of money is $40 billion, velocity is 3, and real output is $60 billion, what is the price level?

A)



0.5

B)



2

C)



2.5

D)



4

Answer:



B

Diff: 2

Topic:



Monetarism

Skill:



Analytic

AACSB:



Analytic Skills

12)



If real output is $25 billion, the price level is 5, and velocity is 5, what is the stock of money?

A)



$1 billion

B)



$10 billion

C)



$25 billion

D)



$625 billion

Answer:



C

Diff: 2

Topic:



Monetarism

Skill:



Analytic

AACSB:



Analytic Skills

13)




If real output is $10 billion, the price level is 3, and velocity is 6, what is the stock of money?

A)



$1.8 billion

B)



$5 billion

C)



$19 billion

D)



$180 billion

Answer:



B

Diff: 2

Topic:



Monetarism

Skill:



Analytic

AACSB:



Analytic Skills

14)



If the stock of money is $100 billion, velocity is 4, and the price level is 5, what is income?

A)



$5 billion

B)



$80 billion

C)



$125 billion

D)



$2,000 billion

Answer:



B

Diff: 2

Topic:



Monetarism

Skill:



Analytic

AACSB:



Analytic Skills

15)



If the stock of money is $250 billion, velocity is 5, and the price level is 10, what is real output?

A)



$5 billion

B)



$125 billion

C)



$500 billion

D)



$12,500 billion

Answer:



B

Diff: 2

Topic:



Monetarism

Skill:



Analytic

AACSB:



Analytic Skills

16)



If income is $20 billion, the price level is 5, and the stock of money is $10 billion, what is the income velocity of money?

A)



0.4

B)



2.5

C)



4

D)



10

Answer:



D

Diff: 2

Topic:



Monetarism

Skill:



Analytic

AACSB:



Analytic Skills

17)




If income is $30 billion, the price level is 3, and the stock of money is $18 billion, what is the velocity of money?

A)



1.4

B)



1.8

C)



5

D)



180

Answer:



C

Diff: 2

Topic:



Monetarism

Skill:



Analytic

AACSB:



Analytic Skills

18)



The quantity theory of money implies that a 3% increase in the money supply will eventually cause

A)



a 3% increase in real GDP.

B)



a 3% increase in disposable income.

C)



a 3% increase in the price level.

D)



a 3% decrease in the unemployment rate.

Answer:



C

Diff: 2

Topic:



Monetarism

Skill:



Conceptual

AACSB:



Reflective Thinking

19)



Which of the following is assumed constant in the quantity theory of money?

A)



money supply

B)



velocity

C)



the price level

D)



output

Answer:



B

Diff: 1

Topic:



Monetarism

Skill:



Fact

20)



According to the quantity theory of money, nominal GDP will double if the money supply is

A)



reduced by one-half.

B)



reduced threefold.

C)



doubled.

D)



tripled.

Answer:



C

Diff: 2

Topic:



Monetarism

Skill:



Conceptual

AACSB:



Reflective Thinking

21)



The quantity theory of money can be written as

A)



MV = PY.

B)



M/V = PY.

C)



MV = P/Y.

D)



MP = VP.

Answer:



A

Diff: 1

Topic:



Monetarism

Skill:



Definition

22)



Velocity is not constant if

A)



the money supply does not depend on the interest rate.

B)



the supply of money depends on the interest rate.

C)



the price level increases as aggregate output increases.

D)



the demand for money depends on the interest rate.

Answer:



D

Diff: 2

Topic:



Monetarism

Skill:



Conceptual

AACSB:



Reflective Thinking

23)



If the demand for money depends on the interest rate, velocity is

A)



not constant, and the quantity theory of money does hold.

B)



not constant, and the quantity theory of money does not hold.

C)



constant, and the quantity theory of money does not hold.

D)



constant, and the quantity theory of money does hold.

Answer:



B

Diff: 2

Topic:



Monetarism

Skill:



Conceptual

AACSB:



Reflective Thinking

24)



If the equation for the quantity theory of money is looked on as a demand-for-money equation, then the demand for money depends on

A)



nominal income but not on the interest rate.

B)



nominal income and the interest rate.

C)



real income but not on the interest rate.

D)



real income and the interest rate.

Answer:



A

Diff: 2

Topic:



Monetarism

Skill:



Conceptual

AACSB:



Reflective Thinking

25)



If the demand for money depends on the interest rate, then a 15% increase in the money supply will increase

A)



nominal GDP by 15%.

B)



nominal GDP by less than 15%.

C)



nominal GDP by more than 30%.

D)



real GDP by 30%.

Answer:



B

Diff: 2

Topic:



Monetarism

Skill:



Conceptual

AACSB:



Reflective Thinking

26)




Assume that the demand for money depends on the interest rate. A decrease in the money supply will cause

A)



the interest rate to increase, the quantity demanded of money to decrease, and the velocity of money to decrease.

B)



the interest rate to increase, the quantity demanded of money to decrease, and the velocity of money to increase.

C)



the interest rate to decrease, the quantity demanded of money to decrease, and the velocity of money to increase.

D)



the interest rate to decrease, the quantity demanded of money to increase, and the velocity of money to decrease.

Answer:



B

Diff: 2

Topic:



Monetarism

Skill:



Analytic

AACSB:



Analytic Skills

27)



Which of the following statements is NOT consistent with the quantity theory of money?

A)



The velocity of money can be affected by how frequently workers are paid.

B)



The velocity of money can be affected by the development of new financial instruments, such as interest-bearing checking accounts.

C)



The velocity of money can be affected by the manner in which the banking system clears transactions between banks.

D)



Velocity can change with changes in the interest rate.

Answer:



D

Diff: 2

Topic:



Monetarism

Skill:



Conceptual

AACSB:



Reflective Thinking

28)



Velocity will be constant if the demand for money with respect to the interest rate is

A)



unitary elastic.

B)



perfectly inelastic.

C)



perfectly elastic.

D)



elastic, but not perfectly elastic.

Answer:



B

Diff: 2

Topic:



Monetarism

Skill:



Conceptual

AACSB:



Reflective Thinking

29)



Empirical evidence suggests that, since 1960, the velocity of money has been

A)



constant.

B)



decreasing.

C)



rising.

D)



fluctuating around zero.

Answer:



C

Diff: 1

Topic:



Monetarism

Skill:



Fact

30)




Which of the following is TRUE?

A)



Measuring money supply using M2 reduces fluctuations in velocity.

B)



Measuring money supply using M1 reduces fluctuations in velocity.

C)



Measuring money supply using M2 increases fluctuations in velocity.

D)



Velocity does not depend on which money supply measurement we use.

Answer:



A

Diff: 2

Topic:



Monetarism

Skill:



Conceptual

AACSB:



Reflective Thinking

31)



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

A)



increase the velocity of money in the short run.

B)



increase real GDP in the short run.

C)



decrease the velocity of money in the short run.

D)



none of the above

Answer:



C

Diff: 3

Topic:



Monetarism

Skill:



Conceptual

AACSB:



Reflective Thinking

32)



It is difficult to test whether the velocity of money is constant over time, because

A)



there has been very little variation in the money supply over time.

B)



there may be a time lag between a change in the money supply and its effects on nominal GDP.

C)



there is only one definition of the money supply.

D)



it is difficult to measure the value of nominal GDP over time.

Answer:



B

Diff: 3

Topic:



Monetarism

Skill:



Conceptual

AACSB:



Reflective Thinking

33)



One of the main insights of monetarism is that

A)



sustained inflation is a purely monetary phenomenon.

B)



the government can effectively manage aggregate demand by using its spending and taxing powers.

C)



velocity is unstable and subject to wide fluctuations.

D)



inflation can continue indefinitely without the cooperation of the Federal Reserve.

Answer:



A

Diff: 1

Topic:



Monetarism

Skill:



Fact

34)



The "strict monetarist" view indicates that an increase in money supply

A)



increases both P and Y.

B)



increases Y only.

C)



increases P only.

D)



increases P and decreases Y.

Answer:



C

Diff: 2

Topic:



Monetarism

Skill:



Fact

35)



Inflation cannot continue indefinitely without

A)



increases in the interest rate.

B)



increases in aggregate output.

C)



increases in investment.

D)



increases in the money supply.

Answer:



D

Diff: 1

Topic:



Monetarism

Skill:



Conceptual

AACSB:



Reflective Thinking

36)



The leading spokesman for monetarism over the last few decades was

A)



John Kenneth Galbraith.

B)



Milton Friedman.

C)



Robert E. Lucas.

D)



Paul Samuelson.

Answer:



B

Diff: 1

Topic:



Monetarism

Skill:



Fact

37)



A monetarist would advocate ________ money supply during recessions and ________ money supply during periods of high inflation.

A)



increasing; increasing

B)



decreasing; increasing

C)



increasing; decreasing

D)



none of the above

Answer:



D

Diff: 1

Topic:



Monetarism

Skill:



Fact

38)



Monetarists argue that the money supply should

A)



grow at a rate equal to the average growth of real output.

B)



grow at a rate slower than the average growth of real output.

C)



grow at a rate greater than the average growth of real output.

D)



be held constant over the business cycle.

Answer:



A

Diff: 1

Topic:



Monetarism

Skill:



Fact

39)



Monetarists and Keynesians

A)



disagree on the speed at which wages change.

B)



agree on the impact of fiscal policy on the economy.

C)



disagree on how the Fed changes money supply.

D)



agree on the usefulness of discretionary policy.

Answer:



A

Diff: 2

Topic:



Monetarism

Skill:



Fact

40)




Monetarists believe

A)



the economy is stable.

B)



the economy is rigid.

C)



the economy does not equilibrate quickly.

D)



the economy is unstable.

Answer:



A

Diff: 2

Topic:



Monetarism

Skill:



Fact

41)



Monetarists believe that real output is determined by

A)



government spending.

B)



the rate of growth of the money supply.

C)



government planning.

D)



aggregate supply.

Answer:



D

Diff: 2

Topic:



Monetarism

Skill:



Fact



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