Economics Chapter 14

Based upon the equation of exchange, which of the following (ceteris paribus) is most likely to bring about inflation?

An increase in the money supply.

Refer to Exhibit 14-1. Starting from point A, a one-shot, demand-side-induced inflation raises the price level in the economy to P2. Assuming no other changes, in the long run the economy is likely to settle at point

B

Refer to Exhibit 14-1. What sequence of points shows the short- and long-run consequences of a fall in the money supply under monetarist assumptions?

B-D-A

Suppose we are at a long-run equilibrium point in an AD-AS model. Then the money supply increases. In the short run, is there any difference between what happens in the simple quantity theory of money (SQTM) version and the monetarist version of the model?

In the monetarist version, the Real GDP rises; in the SQTM version, it does not.

Suppose the Fed buys government securities from the public. The liquidity effect of this is that the interest rate will

decrease

The liquidity effect is the

decrease in the interest rate due to an increase in the supply of loanable funds.

Between 1890 and 1914, the gold stock of the world _______________ and world prices (in general)

doubled; increased.

According to the simple quantity theory of money in the AD-AS framework, the AD curve is

downward sloping.

The money supply rises from $1,800 billion to $1,908 billion. According to the simple quantity theory of money, the price level will ___________ by __________ percent.

rise; 6

If Real GDP is $7,000, the money supply is $5,600, and the price level is 4, then velocity is

5.00

If GDP is $8,000 billion and the money supply is $1,200 billion, velocity is approximately

6.67

According to the simple quantity theory of money, if the money supply falls by 20 percent,

the price level will fall by 20 percent. GDP will fall by 20 percent. a and c

If the money supply is $700, velocity is 5, then in the equation of exchange, PQ is

$3,500.

If the money supply is $6,000, velocity is 5, and Real GDP is 10,000 units of output, then the price level is _____________. If the money supply doubled over a short time period to $12,000, the simple quantity theory of money would predict that _____________________.

$3; the price level would double

If the money supply is $2,000, velocity is 4, and Real GDP is 1,000 units of output, then the price level is _____________. If the money supply doubled over a short time period, the simple quantity theory of money would predict that _____________________.

$8; the price level would double

The money supply falls from $1,200 billion to $1,152 billion. According to the simple quantity theory of money, the price level will decline by __________ percent.

4.00

Refer to Exhibit 14-1. What sequence of points shows the short- and long-run consequences of a rise in the money supply under monetarist assumptions?

A-E-B

Refer to Exhibit 14-1. A continued increase in the money supply by the Fed is likely to take the economy along which of the following paths?

A-E-B-I-C

According to the simple quantity theory of money, an increase in the money supply will shift the __________ curve to the right and raise __________.

AD; the price level

Both the monetarist view of the economy and the simple quantity theory of money hold that velocity is constant.

False

The equation of exchange is an economic theory.

False

The simple quantity theory of money predicts that the larger the percentage change in the money supply, the larger the percentage change in Real GDP.

False

The true cost of borrowing is the nominal interest rate.

False

In the equation of exchange, the money supply multiplied by velocity equals

GDP

Which of the following statements is true?

GDP is larger than the money supply if velocity is greater than 1.

Which of the following statements is false?

The exchange equation assumes that velocity is constant.

Which of the following statements is true?

To a large degree, Keynesians focus on the spending components of total expenditures when they seek to understand what determines GDP; monetarists focus on the money supply and velocity when their objective is the same.

In a country in which the government uses price controls to attempt to control inflation, nonmoney rationing devices will be needed to resolve shortages.

True

In seeking to explain what determines GDP, monetarists focus on the money supply while Keynesians focus on the spending components of total expenditures.

True

The California gold rush resulted in an increase in the amount of money in circulation and an increase in prices across the country.

True

According to Milton Friedman, continued inflation is always and everywhere

a monetary phenomenon.

In the monetarist version of the AD-AS framework, starting from long-run equilibrium, an increase in the money supply produces

a rise in Real GDP in the short run, but not in the long run.

The simple quantity theory of money predicts that an increase in M of 5 percent will lead to

an increase in P of 5 percent.

Refer to Exhibit 14-2. The economy moves from point 1 to 2 to 3 to 4 to 5 to 6 to 7. What explains this?

an initial decrease in SRAS, followed by alternating rises in AD and decreases in SRAS

The velocity of money is the __________ number of times a dollar is spent to buy final goods and services in a year.

average

If the simple quantity theory of money predicts well, what would we expect to see (in the real world)?

changes in the money supply strongly correlated with changes in inflation rates

The increase in the interest rate due to a higher expected inflation rate is called the __________ effect.

expectations Fisher a or b

An increase in the money supply that leads to an increase in expected inflation, which in turn leads to an increase in the interest rate, is best described as the

expectations effect.

Suppose the economy starts off producing Natural Real GDP. Next, aggregate demand rises, ceteris paribus. As a result, the price level rises in the short run. In the long run, when the economy has moved back to producing Natural Real GDP, the price level will be

higher than it was in short-run equilibrium.

Ceteris paribus, the greater the increase in the money supply, the __________ the inflation rate, the __________ the expected inflation rate, and the __________ the interest rate.

higher; higher; higher

Some economists argue that increases in government spending are not a likely source of continued inflation because

increases in government spending cause reductions in other spending components.

When the Fed conducts open market operations, the impact of the buying or selling of bonds will include changes in

interest rates.

According to monetarists, changes in velocity can

lower GDP raise GDP a and b

According to the equation of exchange, if GDP equals $400 billion and the money supply equals $50 billion, the velocity of money

must be 8

According to the simple quantity theory of money in the AD-AS framework, when the money supply decreases, the result is __________ in Real GDP and __________ in the price level.

no change; a fall

According to the simple quantity theory of money in the AD-AS framework, when the money supply increases, the result is __________ in Real GDP and __________ in the price level.

no change; a rise

The simple quantity theory of money predicts that if

the money supply rises by 10 percent, then the price level rises by 10 percent.

When the Fed conducts open market operations, the impact of the buying or selling of bonds will include changes in

the money supply. interest rates. the expected rate of inflation. a b and c

In the equation of exchange, the letter "V" stands for

velocity.

The assumption made about Real GDP in the simple quantity theory of money produces a ____________________ curve in the AD-AS version of the theory.

vertical AS