Download Chapter 13 Money and the Economy

Chapter 13 Money and the Economy
1. The term velocity in the equation of exchange represents
a. the average number of times that a unit of money is spent to buy final goods and
services during a year’s time.
b. the number of days that it takes the average wage earner to spend a month’s income.
c. the ratio of currency outside the banks to bank reserves.
d. none of the above
ANS:
a. Correct.
b. Incorrect. Velocity is the number of times that a unit of money is spent to buy final
goods and services during a year’s time.
c. Incorrect. Velocity is the number of times that a unit of money is spent to buy final
goods and services during a year’s time.
d. Incorrect. Answer A is correct.
2. According to monetarists, velocity (V)
a. usually changes in the opposite direction of any given change in the money supply.
b. is quite stable and changes in a predictable way.
c. changes erratically in that it may either rise or fall in response to a given change in the
money supply.
d. none of the above
ANS:
a. Incorrect. Monetarists believe that velocity is relatively stable and that any changes are
predictable.
b. Correct.
c. Incorrect. Monetarists believe that velocity is relatively stable and that any changes are
predictable.
d. Incorrect. The correct answer is B.
3. The equation of exchange states that
a. M x P = V x Q
b. M x Q = P x V
c. P x Q = M x V
d. none of the above
ANS:
a. Incorrect. The correct statement is M x V = P x Q.
b. Incorrect. The correct statement is M x V = P x Q.
c. Correct.
d. Incorrect. The correct answer is C
4. According to the simple quantity theory of money,
a. velocity and Real GDP (output) are assumed to be constant over short time periods.
© 2010 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be
different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
b. the money supply is constant in both the long-run and the short-run.
c. the Fed has too much power over the economy.
d. none of the above
ANS:
a. Correct.
b. Incorrect. No; velocity and output are assumed constant in the short-run, but not in the
long-run.
c. Incorrect. The simple quantity theory of money assumes velocity and output are
constant in the short-run.
d. Incorrect. Answer A is correct.
5. Suppose in a hypothetical economy that velocity is 5, the money supply is $5,000, Real
GDP is 2,500 units of output, and the price level is $10. If the money supply doubled
over a short time period to $10,000, the simple quantity theory would predict that
a. Real GDP would double to 5,000 units.
b. velocity will decline dramatically such that there will be little change in either output
or the price level.
c. the price level will fall to $5.
d. the price level would double to $20.
ANS:
a. Incorrect. Output is assumed to be virtually constant in the short-run because the
economy is assumed to already be operating at full employment.
b. Incorrect. Velocity is assumed to be constant in the simple quantity theory.
c. Incorrect. The price level would roughly double because velocity if assumed to be
constant in the simple quantity theory.
d. Correct.
6. In the context of the equation of exchange, which of the following is most likely to
bring about inflation, ceteris paribus?
a. a slight decline in velocity
b. an increase in the money supply
c. an increase in Q
d. None of the above.
ANS:
a. Incorrect. Inflation is caused by either an increase in aggregate demand or by a
decrease in aggregate supply. A decline in velocity would, other things equal, result in a
decrease, not an increase, in AD.
b. Correct.
c. Incorrect. Ceteris paribus, an increase in Q would cause deflation.
d. Incorrect. The correct answer is B.
7. If the economy is initially in long-run equilibrium and the money supply increases,
monetarists believe that one of the following will occur
© 2010 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be
different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
a. the AD curve will shift to the left and inflation will occur.
b. Real GDP will increase to a higher long-run equilibrium level without any increase in
the price level.
c. Real GDP will rise, but that it is not sustainable. The SRAS curve will ultimately shift
to the left with the result that real GDP will fall to its long-run natural level as the
unemployment rate rises to its natural rate with the result that real GDP is the same as
before the money supply increase, but prices are higher.
d. none of the above
ANS:
a. Incorrect. The AD curve would shift to the right.
b. Incorrect. Monetarists believe that a higher equilibrium real GDP will occur, but that it
is not sustainable because the SRAS curve will ultimately shift to the left with the result
that real GDP is the same as before the money supply increase and prices are higher.
c. Correct.
d. Incorrect. Answer C is correct.
8. Suppose that you expect the inflation rate to be 2 percent, but that the actual inflation
rate turns out to be 4 percent. If you borrow money for 6 percent, the ex ante real interest
rate is
a. 4 percent.
b. 2 percent. .
c. 0 percent. .
d. None of the above. .
ANS:
a. Correct.
b. Incorrect. The ex post real rate is 2 percent. The ex ante real rate is 4 percent, the
difference between the nominal 6 percent rate and the expected inflation rate
c. Incorrect. The ex ante real rate is 4 percent, the difference between the nominal 6
percent rate and the expected inflation rate
d. Incorrect. Answer A is correct
9. When the Fed conducts an expansionary open market operation by buying bonds, this
impacts the loanable funds market by causing a
a. positive liquidity effect only. .
b. negative liquidity effect, i.e. it reduces the supply of loanable funds.
c. negative income effect as real GDP tends to declined.
d. combination of effects including the liquidity effect, the price level effect, income
effect, and possibly an expectations effect.
ANS:
a. Incorrect. It also causes an income effect, a price level effect, and possibly an
expectations effect
b. Incorrect. Buying bonds actually increases bank reserves and therefore the supply of
loanable funds
© 2010 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be
different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
c. Incorrect. This example of an OMO would cause a positive income effect that would
in turn increase both the demand for and supply of loanable funds. In addition, it would
cause price level, liquidity, and expectations effects.
d. Correct.
10. The velocity of money can be expressed as
a. M/GDP.
b. GDP/M.
c. Q/M.
d. M/P.
ANS:
a. Incorrect. The velocity of money can be expressed as GDP/M.
b. Correct
c. Incorrect. The velocity of money can be expressed as GDP/M
d. Incorrect. The velocity of money can be expressed as GDP/M
© 2010 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be
different from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.