Money Ch.14 Quiz

Explain the Monetarist view and position on money, velocity and how it affects aggregate demand:

Monetarist economists do not hold that velocity is constant nor do they hold that output is constant. The monetarist positions claim that velocity changes in a predictable way, aggregate demand depends on the money supply and velocity. The also believe that the SRA curve is upward-sloping and the economy is self-regulating (prices and wages are flexible). Monetarists believe that aggregate demand is affected when money supply and velocity increase in price. According to monetarists, if the economy is initially in long-run equilibrium, then (1) an increase in the money supply will raise the price level and Real GDP in the short run and will raise only the price level in the long run (2) a decrease in the money supply will lower the price level and Real GDP in the short run and will lower only the price level in the long run; (3) an increase in velocity will raise the price level and Real GDP in the short run and will raise only the price level in the long run (4) a decrease in velocity will lower the price level and Real GDP in the short run and will lower only the price level in the long run.

Explain the Simple Quantity Theory of Money:

The simple quantity theory of money: velocity (V) and real GDP (Q) are constant and predict the changes in the money supply (M) lead to strictly proportional changes in the price level (P)

The process of lowering the price level in the economy to normalize and stabilize prices is best known as a. Transitory Inflation b. Inflation c. Price Defaction d. Deflation e. Stagflation

d. Deflation

Suppose the real interest rate is 5%, and the expected inflation rate is 3%. The nominal interest rate is _____ % ?

8

Which of the following is a position held by monetarists? a. The short-run aggregate supply curve is horizontal. b. The economy is unstable; wages and prices are inflexible. c. The velocity of money is constant and affects Aggregate Demand d. Aggregate demand depends on the money supply and on velocity.

?? not c

Explain in detail how an increase in the money supply will affect aggregate demand and aggregate supply model: You can upload an image or model if necessary.

A change in the money supply or a change in velocity will change aggregate demand and therefore lead to a shift in the AD curve. Specifically, either an increase in the money supply or an increase in velocity will increase aggregate demand and therefore shift the AD curve to the right. A decrease in the money supply or a decrease in velocity will decrease aggregate demand and therefore shift the AD curve to the left. whereas In the simple quantity theory of money, Real GDP is assumed to be constant in the short run. This assumption means that the AS curve is vertical. Since velocity is assumed to be constant, only a change in money supply can change aggregate demand. In the face of a vertical AS curve, any change in the money supply shifts the AD curve and changes only the price level, not the Real GDP.

Explain how inflation can be good and bad in the economy

There are four types of inflation in the economy. 1. Temporary inflation" short term" 2. One-shot inflation: a one-time increase in the price level 3. Continues inflation: the price level continues to increase yearly 4. Hyperinflation: a rapid increase in the price level (monthly, weekly, daily) Inflation could be good for an economy if the economy is not running at full demand this theoretically will increase aggregate demand. Inflation could be bad for an economy because it will reduce the purchasing power of consumers. This harms consumers as well as interest rates.

Suppose velocity rises and the money supply falls: How will things change in the AD-AS framework if a change in the money supply is completely offset by a change in velocity? a. The increase in velocity could shift the AD curve to the right by the same amount as the fall in the money supply shifts the AD curve to the left. b. A change in the money supply would decrease Real GDP, the short-run price level, and increase the price level the long-run. c. The fall in velocity could shift the AD curve to the right by the same amount as the increase in the money supply shifts the AD curve to the left. d. The fall in velocity would shift the AD curve to the left by the same amount as the increase in the money supply shifts the AD curve to the left.

a. The increase in velocity could shift the AD curve to the right by the same amount as the fall in the money supply shifts the AD curve to the left.

Monetarists believe that a fall in the money supply will cause the price level to _________________ and Real GDP to _________________ in the short run. In the long run, Real GDP will _______________ at a ______________ Price level. a. Monetarists believe that a fall in the money supply will cause the price level to decrease and Real GDP to increase in the short run. In the long run, Real GDP will go back to normal at a higher Price level. b. Monetarists believe that a fall in the money supply will cause the price level to decrease and Real GDP to decrease in the short run. In the long run, Real GDP will go back to normal at a lower Price level. c. Monetarists believe that a fall in the money supply will cause the price level to increase and Real GDP to increase in the short run. In the long run, Real GDP will go back to normal at a higher Price level. d. Monetarists believe that a fall in the money supply will ca

b. Monetarists believe that a fall in the money supply will cause the price level to decrease and Real GDP to decrease in the short run. In the long run, Real GDP will go back to normal at a lower Price level.

Suppose congress approves the request of the federal reserve to restrict the money supply and the velocity of money slows down; Which of the following is likely to occurr: a. The aggregate demand curve will not move since the money supply only affects consumption b. The aggregate demand curve will decrease in the short run and the aggregate supply may decrease c. The aggregate demand curve will increase in the short run and the aggregate supply may decrease d. The aggregate demand curve will increase in the short run and the aggregate supply may increase e. The aggregate demand curve will decrease in the short run and the aggregate supply may increase

b. The aggregate demand curve will decrease in the short run and the aggregate supply may decrease

Monetarists believe that a an increase in velocity will cause the price level to _______________ and real GDP to __________________ in in the short run. In the long run, Real GDP will _____________ at a ________________ Price Level. a. Monetarists believe that a an increase in velocity will cause the price level to decrease and real GDP to decrease in in the short run. In the long run, Real GDP will go back to normal at a higher Price Level. b. Monetarists believe that a an increase in velocity will cause the price level to decrease and real GDP to increase in in the short run. In the long run, Real GDP will go back to normal at a higher Price Level. c. Monetarists believe that a an increase in velocity will cause the price level to rise and real GDP to increase in in the short run. In the long run, Real GDP will go back to normal at a higher Price Level. d. Monetarists believe that a an increase in velocity will

c. Monetarists believe that an increase in velocity will cause the price level to rise and real GDP to increase in in the short run. In the long run, Real GDP will go back to normal at a higher Price Level.