chapter 15
According to the quantity theory of money, a decision on the part of all business firms currently paying employees on a monthly basis to begin paying on a weekly basis would be expected to a. increase velocity and increase nominal GDP. b. increase velocity and decrease nominal GDP. c. decrease velocity and increase nominal GDP. d. decrease velocity and decrease nominal GDP.
A
As we approached the end of the millennium, many economic crackpots advised citizens to hold large quantities of cash in anticipation of Y2K disasters. What effect would this have had on velocity if many people had been foolish enough to follow this advice? a. It would have decreased. b. It would have increased. c. It would have remained constant. d. Velocity is unrelated to cash balances.
A
During the financial crisis of 2007-2009 the interest rate spread on mortgage-backed securities over Treasury bills a. increased tremendously. b. increased moderately. c. decreased moderately. d. decreased tremendously.
A
Following an anticapitalist coup, Freedonia forces all citizens to turn in and stop using all credit cards. What is the most likely effect of this on velocity? a. It will decrease. b. It will increase. c. It will remain constant. d. Velocity is unrelated to credit cards.
A
If the Fed's monetary policy causes a substantial decrease in interest rates, what is the most likely impact on velocity? a. It will decrease. b. It will increase. c. It will remain constant. d. Velocity is unrelated to interest rates.
A
In 2007-2009, the Fed cut interest rates to limit the international financial crisis. What is the effect of this on velocity? a. It will decrease. b. It will increase. c. It will remain constant. d. Velocity is unrelated to interest rates.
A
The equation of exchange is an accounting identity that a. relates the money supply to nominal GDP. b. equates the demand for money with the supply of money. c. relates the money supply to real GDP. d. accounts use to balance assets and liabilities.
A
The inflation rate in January of 2009 as measured by the CPI was zero. If inflation were to remain at zero for a long period, what would be the effect on velocity? a. It will decrease. b. It will increase. c. It will remain constant. d. Velocity is unrelated to interest rates.
A
Velocity can be computed with the formula a. (Annual spending)/(Money supply). b. (Annual income)/(Annual spending). c. (Average income)/(Average spending). d. (Money supply)/(Average income).
A
When comparing the Keynesian and monetarist approaches, the only substantive difference is that a. the Keynesian equation leads to a prediction of real GDP; the monetarist equation leads to a prediction of nominal GDP. b. Keynesians concentrate on aggregate demand and monetarists concentrate on aggregate supply. c. Keynesians approach aggregate demand by multiplying the money supply by velocity, while monetarists use the equilibrium conditions of the expenditure schedule. d. Keynesian analysis suggests that money affects consumption first while monetarist analysis suggests that money affects investment spending first.
A
Which is likely to be larger, the velocity of M1 or M2? a. M1, because M2 is a larger number. b. M2, because M1 is a larger number. c. The velocities of both are approximately equal. d. The numbers of velocity switch in relative size.
A
Which of the following best describes the assumption that monetarists make regarding velocity? a. It is fairly predictable in the short run and certainly in the long run. b. It is not possible to predict velocity in the short or long run. c. It is variable in the long run but predictable in the short run. d. It is constant in the long run but variable in the short run.
A
Which of the following was not a criticism of the unconventional monetary policy used by the Fed in 2009 and 2010? a. tendency towards higher unemployment b. tendency towards higher inflation c. usurping authority which should be allocated to Congress d. determining which banks would be allowed to fail
A
Which of the following was the result of the Federal Reserve's purchase of mortgage-backed securities in 2009? a. MBS interest rates declined, home mortgage rates declined, and the Fed turned a profit on these operations. b. MBS interest rates declined, home mortgage rates declined, but the Fed had a loss on these operations. c. MBS interest rates increased, home mortgage rates declined, and the Fed turned a profit on these operations d. MBS interest rates increased, home mortgage rates increased, but the Fed had a loss on these operations
A
Which of the following will increase the velocity of circulation? a. Interest rates increase. b. The inflation rate decreases. c. Federal banking legislation abolishes credit cards. d. Employers decide to pay employees once a month instead of once a week.
A
81. Monetarists use the equation of exchange to predict the effects of changes in M on a. velocity. b. nominal GDP. c. real GDP. d. the price level.
B
An employee of Macro.com Corporation is paid $5,000 a month, which she spends regularly throughout the month until she has a zero balance in her checking account at the end of the month. If the corporation changes to a semi-monthly payroll schedule, how will the employee's average cash balance change? Assume she does not change her spending pattern when she is now paid twice a month. a. It changes from $5,000 to $2,500 per month. b. It changes from $2,500 to $1,250 per month. c. It changes from $1,250 to $625 per month. d. It changes from $500 to $250 per month.
B
Both approaches-Keynesian and monetarist-are ways of analyzing a. aggregate supply. b. aggregate demand. c. the average price level. d. government spending and expenditures.
B
By purchasing large amounts of mortgage-backed securities (MBS) in 2009, the Federal Reserve's goal was to a. raise the price of MBS and raise their yields. b. raise the price of MBS and lower their yields. c. lower the price of MBS and raise their yields. d. lower the price of MBS and lower their yields.
B
During the financial crisis of 2007-2009 the interest rate on mortgage-backed securities had a. increased and the Treasury interest rate had risen. b. increased and the Treasury interest rate had fallen. c. decreased and the Treasury interest rate had risen. d. decreased and the Treasury interest rate had fallen.
B
How will an increase in the efficiency of the payments mechanism effect velocity? a. It will decrease. b. It will increase. c. It will remain constant. d. Velocity is unrelated to payments.
B
If economists say that a 7 percent growth in the money supply will increase aggregate demand by 7 percent, they are assuming that velocity a. will decrease. b. is constant. c. will increase. d. is unpredictable.
B
If nominal GDP is $7,700 billion and M1 is $1,000 billion, then velocity is a. 10.7. b. 7.7. c. 7.1. d. 7.0.
B
If the Fed's monetary policy causes a substantial increase in interest rates, what is the most likely impact on velocity? a. It will decrease. b. It will increase. c. It will remain constant. d. Velocity is unrelated to interest rates.
B
If you believe that velocity is constant and that the aggregate supply curve is vertical, then the quantity theory of money would predict that a doubling of the money supply would cause a doubling of a. nominal output and real output. b. nominal output and no change in real output. c. real output and no change in nominal output. d. the price level and real output.
B
In 1996, if nominal GDP was about $8.5 thousand billion. The stock of money was a. about the same as this. b. much less than this. c. much more than this. d. unrelated to this number.
B
In 2005-2006, the Fed increased interest rates in an attempt to halt inflation. What was the most likely effect of raising interest rates on velocity? a. It will decrease. b. It will increase. c. It will remain constant. d. Velocity is unrelated to saving accounts.
B
Many banks offer accounts featuring "Automatic Transfer from Savings" allowing customers to overdraw checking accounts and the bank will transfer enough funds to cover the check automatically. Most likely, what is the effect of this feature on velocity? a. It will decrease. b. It will increase. c. It will remain constant. d. Velocity is unrelated to saving accounts.
B
Monetarists have received this label because they emphasize the role of a. money supply in determining aggregate supply. b. the money supply in determining nominal GDP. c. the Fed in making monetary policy. d. the money supply in determining interest rates and investment.
B
Nominal GDP is proportional to money stock when a. velocity of money is volatile. b. velocity of money is constant. c. there are major changes in the value of velocity of money. d. velocity of money is zero.
B
The historical data on velocity shows that velocity for a. M1 has fallen since 1929 and has become more stable since 1981. b. M1 has risen since 1949 and has become more volatile since 1981. c. both M1 and M2 have increased since 1949 but have become more stable since 1979. d. both M1 and M2 have declined since 1949.
B
The major difference between the Keynesian approach and the monetarist approach is that a. Keynesian analysis explains an equilibrium condition and monetarism does not. b. in Keynesian analysis, money affects the economy by first affecting interest rates; monetarist analysis is not limited to working through interest rates. c. monetarism explains an equilibrium condition and Keynesian analysis does not. d. there are no differences.
B
The principal factor determining velocity is the a. level of income. b. frequency with which paychecks are distributed. c. frequency with which taxes are paid. d. growth rate of real output.
B
The speed with which money circulates through the economy is called the a. oversimplified multiplier. b. velocity of circulation. c. exchange rate. d. money multiplier.
B
The velocity of circulation is the a. speed at which the multiplier takes effect. b. speed at which money circulates. c. speed at which tax cuts get spent. d. rate at which money creation takes place.
B
Treasury securities have ____ risk of default and mortgage-backed securities have ____ risk of default. a. no; no b. no; some c. some; no d. some; some
B
Velocity is commonly calculated by which of the following formulas? a. (Value of money stock)/(Value of nominal GDP) b. (Value of transactions)/(money stock) c. (Value of financial transactions)/(GDP) d. (Value of output)/(Value of input)
B
What is the effect on velocity if payments are made more often? a. It will decrease. b. It will increase. c. It will remain constant. d. Velocity is unrelated to payments.
B
When analyzing how money affects income, we are analyzing the way in which a a. stock affects another stock. b. stock affects a flow. c. flow affects another flow. d. flow affects a stock.
B
When the Fed increases the money supply, interest rates a. rise, causing velocity to fall. b. fall, causing velocity to fall. c. rise, causing velocity to rise. d. fall, causing velocity to rise.
B
Which of the following was not a reason that the Federal Reserve took on additional risks associated with unconventional policy during the recession of 2007-2009? a. The large budget deficit constrained fiscal policy. b. The inflated price of Treasury bills made them too expensive to purchase in open market operations. c. Only the Federal Reserve acting as the central bank can serve as the lender of last resort. d. The Fed was able to act more quickly than Congress.
B
Which of the following will reduce the velocity of circulation of the money stock? a. The inflation rate increases. b. The interest rate falls. c. Credit cards are used more frequently. d. More employees are paid once a week instead of once a month.
B
Which one of the following will cause velocity to increase? a. a decrease in interest rates b. increasing the efficiency of the payments system c. switching from weekly to monthly payroll checks d. an increase in the money supply
B
____ is a school of economic thought which uses equation of exchange to analyze the macro economic data. a. Mercantilism b. Monetarism c. Supply side economics d. Keynesianism
B
A scatter diagram of money growth rates and inflation rates from 1982 to 2010 indicates a. a clear direct relationship between money growth and inflation. b. a clear indirect relationship between money growth and inflation. c. no clear relationship between money growth rates and inflation. d. that inflation is always and everywhere a monetary phenomenon.
C
According to the quantity theory of money currently used by monetarists, assuming velocity is constant (at a value of 5), a 10 percent increase in the money supply will raise a. nominal GDP by 50 percent. b. real GDP by 10 percent. c. nominal GDP by 10 percent. d. real GDP by 50 percent.
C
According to the simple quantity theory of money, a change in the money supply of 9.6 percent would lead to a a. 9.6 percent change in velocity. b. 9.6 percent change in real GDP. c. 9.6 percent change in nominal GDP. d. 9.6 percent change in aggregate supply.
C
As the price level rises, the demand for money a. decreases because interest rates also increase. b. decreases because consumers buy fewer goods and services. c. increases because more money is needed for each transaction. d. increases because investment spending will also increase.
C
During the financial crisis of 2007-2009, why did the Federal Reserve begin to utilize various types of unconventional monetary policy? a. the federal funds rate had already been increased as much as possible b. the discount rate had already been increased as much as possible c. the federal funds rate had already been reduced to zero d. the discount rate had already been reduced to zero
C
Economists observed the following growth rates in the fourth quarter of 1995: real GDP = 2.8 percent; M1 = 7.8 percent; GDP Deflator = 2.2 percent. Given this data, the growth of velocity was approximately a. −7.8 percent. b. −5.0 percent. c. −2.8 percent. d. −2.2 percent. e. −2.0 percent.
C
If you assume that the equation of exchange is a dependable economic model, then the Fed can control a. real GDP. b. aggregate supply. c. nominal GDP. d. economic growth.
C
If you divide the amount of nominal GDP by the stock of money, you have computed the a. multiplier. b. price level. c. velocity of circulation. d. inflation rate.
C
In 2009, nominal GDP was $14,050 billion and M1 was $1,587 billion. Velocity was a. 0.11. b. 8.85. c. 11.30. d. 14.25.
C
In response to the Great Recession of 2007-2009, when did the Federal Reserve first cut the federal funds rate to zero? a. December 2007 b. June 2008 c. December 2008 d. January 2010
C
In the monetarist view, the money supply affects the economy a. through investment spending and government spending. b. indirectly through interest rates. c. directly, apart from interest rates. d. by altering the size of the money multiplier.
C
In the second quarter of 1995, the following values were observed: real GDP = 4,359.3 billion; GDP Deflator = 325.1; and M1 = 989.5. What is the value of velocity? a. 32.51 b. 24.31 c. 14.32 d. 2.31
C
In utilizing unconventional monetary policy in 2009, the Federal Reserve purchased a. real estate worth more than $2 trillion. b. $800 billion in Treasury bills. c. over $1 trillion in mortgage backed securities. d. $600 billion in long-term Treasury bonds.
C
Is the equation of exchange an economic model? a. Yes, it is a simple but powerful model. b. No, economic models cannot be equations. c. No, it is merely an arithmetic statement. d. Yes, it is a cause-and-effect model.
C
Monetarism resembles Keynesian thinking in that they both a. emphasize supply and ignore demand. b. integrate supply-side analysis into their models. c. emphasize demand side effects. d. emphasize the importance of fiscal policy.
C
The equation M × V = P × Y is called the a. multiplier formula. b. transactions formula. c. equation of exchange. d. balanced exchange formula.
C
The major limitation of both the Keynesian approach and the monetarist approach is that both a. focus on the determination of interest rates to the exclusion of price levels. b. study the determination of real GDP equilibrium without including the price level. c. are ways of studying the aggregate demand curve, but to learn anything about the price level and output, the aggregate supply curve must be included in the analysis. d. concentrate on interest rates without considering changes in consumption or net exports.
C
The most common estimate of the value of transactions used to estimate velocity is a. real GDP. b. total sales. c. nominal GDP. d. cash balances.
C
Velocity can be calculated as the ratio of the value of transactions to a. the price level. b. level of real GDP. c. the money stock. d. the inflation rate.
C
What do most economists think is the most accurate statement about velocity? a. It is fairly constant in the short run, but varies considerably in the long run, complicating predictions about nominal GDP. b. M1 velocity is more stable in the short run than M2 velocity, and it has been a superior tool in predicting changes in nominal GDP. c. It is not constant in the short run, and predictions about nominal GDP have not fared well. d. M2 velocity has been less stable than M1 velocity, but both are reliable enough to make accurate predictions about changes in nominal GDP.
C
When the Fed decreases the money supply, interest rates a. rise, causing velocity to fall. b. fall, causing velocity to fall. c. rise, causing velocity to rise. d. fall, causing velocity to rise.
C
Which of the following would tend to decrease velocity? a. an increase in interest rates b. more frequent paychecks c. expected decreases in inflation d. more efficient payment systems
C
A factor increasing the popularity of monetarism in the late 1970s was the a. ease with which the Fed controlled the money supply. b. excellent performance of the economy in the 1970s. c. the fear of budget deficits and growing federal debt. d. the predictable behavior of velocity until about 1980.
D
A look at the historical data indicates that velocity for M1 a. has been more variable than the velocity for M2, but both have been fairly constant for the past 65 years. b. and M2 have both trended downward, but velocity for M2 has been more erratic than velocity for M11. c. has been fairly constant for the past 65 years, but velocity for M2 has trended downward. d. has trended upward in the past 65 years, but velocity for M2 has been more constant.
D
According to the monetarists, the velocity of money is a. constant by definition. b. highly variable and unpredictable. c. constant as a matter of empirical proof. d. not constant but predictable.
D
Critics of the unconventional monetary policies in 2009 and 2010 argued that by deciding which financial institutions would fail and which would not, the Fed was assuming authority that rightfully belonged to a. the FDIC. b. the U.S. Treasury. c. the President. d. Congress.
D
Economists observed the following growth rates in the fourth quarter of 1995: real GDP = 2.8 percent; M1 = 7.8 percent; GDP Deflator = 2.2 percent. Given this data, the growth of nominal GDP was approximately a. 12.8 percent. b. 10.0 percent. c. 5.6 percent. d. 5.0 percent. e. 0.6 percent.
D
Economists who focus their analyses on the effects of a change in the money supply and velocity are called a. realists. b. Keynesians. c. supply-siders. d. monetarists.
D
For both Keynesians and monetarists to predict accurately the effects of a change in the money supply on the price level, they need to add ____ to their analysis. a. aggregate demand b. nominal GDP c. real GDP d. aggregate supply e. government spending
D
If credit cards were suddenly ruled illegal and were no longer used, the most likely effect would be a decrease in the a. demand for money. b. level of cash balances. c. average checking account balance. d. velocity of circulation.
D
If nominal GDP is 8,100 billion florins and the money supply is 900 billion florins, the velocity of circulation is a. 900.0. b. 90.0. c. 81.0. d. 9.0. e. 8.1.
D
If the public decides to hold smaller cash balances, this will cause a(n) a. increase in interest rates. b. decrease in average paychecks. c. increase in nominal GDP. d. increase in velocity.
D
If you believe that velocity is constant and that the aggregate supply curve is horizontal, then the quantity theory of money would predict that a doubling of the money supply would cause a doubling of the a. price level and real output. b. price level. c. price level and no change in real output. d. real output.
D
In order to consider the equation of exchange an economic model, what must we assume? a. Real GDP is a constant value. b. Changes in GDP cause changes in the money supply. c. The money supply is constant. d. Changes in velocity are small and predictable.
D
In the short run, an increase in the quantity of money normally a. has no effect; in the long run, V will increase. b. has no effect; in the long run, V will decrease. c. results in an increase in velocity. d. results in a decrease in velocity.
D
In utilizing unconventional monetary policy in 2010, the Federal Reserve purchased a. real estate worth more than $2 trillion. b. $800 billion in Treasury bills. c. over $1 trillion in mortgage backed securities. d. $600 billion in long-term Treasury bonds.
D
The current debate about fiscal and monetary policy tends to focus on a. which policy is less destabilizing. b. which policy is more effective. c. whether the Fed can control the money supply. d. which policy works more quickly.
D
The difference between the equation of exchange and the quantity theory of money is that the a. equation of exchange assumes that the level of real GDP is constant. b. quantity theory of money assumes that the Fed has no control over the money supply. c. equation of exchange assumes that the level of nominal GDP is constant. d. quantity theory of money assumes that velocity is virtually constant.
D
The efficiency of the payments' mechanism affects a. the speed with which money can be exchanged for other assets. b. how quickly individual loan applications will be approved. c. how slowly individuals deplete their cash balances. d. the speed with which financial institutions can process checks and other funds.
D
The equation of exchange can be written as a. Velocity × Nominal GDP = Price Index b. Real GDP × Price Index = Money supply c. Money supply × Price Index = Real GDP d. Money supply × Velocity = Nominal GDP
D
The quantity theory of money assumes that a. velocity varies inversely with interest rates. b. if velocity equals six, the Fed can increase nominal GDP by 30 percent if it increases the money supply by 5 percent. c. changes in the money supply affect output but not prices. d. changes in velocity are so small that velocity can be considered constant.
D
The reason that velocity increases when interest rates rise is a. the Fed encourages banks to turn money in faster for recycling, which causes money to move faster. b. the opportunity cost of saving increases, so people hold smaller cash balances. c. home mortgage payments increase, so people write larger checks that reduces their checking account balances. d. the opportunity cost of holding money increases, so average money balances decrease.
D
The relationship between money growth rates and inflation between 1982 and 2010 helps explain why, by the 1990s, most economists had a. adopted the monetarist explanation of inflation. b. adopted a rules-only approach to monetary policy. c. become more convinced of the monetary causes of inflation. d. abandoned monetarism as the primary explanation of inflation.
D
Which of the following is an example of the Fed's use of unconventional monetary policy? a. buying assets other than Treasury bills b. participating in rescue operations for troubled financial institutions c. lending massive amounts to banks and other financial institutions d. all of the above
D
Which of the following was a reason that the Federal Reserve took on additional risks associated with unconventional policy during the recession of 2007-2009? a. The inflated price of Treasury bills made them too expensive to purchase in open market operations. b. The large budget deficit constrained conventional monetary policy. c. The U.S. Treasury was unable to sell Treasury bills in the primary market. d. The Fed was able to act more quickly than Congress.
D
In the equation of exchange, velocity of money increases when a. Y increases without any changes in P and M. b. Y falls without any changes in P. c. M increases without any changes in P and Y. d. P falls without any changes in Y and M.
a
The equation of exchange is written as a. M × V = P × Y. b. M × P = V × Y. c. M × Y = P × V. d. M × Y = Y × P.
a
Critics of macroeconomic stabilization policies argue that a. economists are unable to influence policy. b. stabilization policies often do more harm than good. c. stabilization theory has no practical effect. d. policy makers need practical advice, not theory.
b
If financial news broadcasts reported that inflation was likely to rise significantly next year, what would most likely happen to the velocity of circulation? a. It will decrease. b. It will increase. c. It will remain constant. d. Velocity is unrelated to inflation.
b
Since the 1970s, the velocity of money has a. behaved in a predictable fashion. b. behaved in an erratic fashion. c. decreased in value. d. increased in a stable and predictable fashion.
b
During the financial crisis of 2007-2009, the proper policy response was a. contractionary monetary and fiscal policy. b. contractionary monetary and expansionary fiscal policy. c. expansionary monetary and fiscal policy. d. expansionary monetary and contractionary fiscal policy.
c
Monetarists maintain that a. the best way to study the economy is with the expenditure schedule. b. control over the money supply implies control over real GDP. c. velocity is not constant, but is fairly predictable. d. All of the above are correct.
c
Which of the following is an example of unconventional monetary policy? a. the Federal Reserve selling T-bills b. the Federal Reserve decreasing the discount rate c. the Federal Reserve purchasing mortgage-backed securities d. none of the above
c
Which of the following will tend to increase velocity? a. a decrease in the number of payments b. a decrease in inflation c. an increase in interest rates d. an increase in the money supply e. All of the above.
c
When something happens to the economy, monetarists ask two questions: a. What does this do to government spending, and what does it do to tax revenues? b. What does this do to real GDP, and what does it do to the price level? c. What does this do to investment spending, and what does it do to net exports? d. What does this do to the money supply, and what does it do to velocity?
d
Which of the following is the formula for velocity? a. Velocity = nominal GDP/real GDP b. Velocity = real GDP/M c. Velocity = (P × Y)/(M × V) d. Velocity = nominal GDP/M
d
