Exam 20: Policy Disputes Using the Self-Correcting Aggregate Demand and Supply Model

If the economy is not operating at full-employment real GDP, classical economists prescribe a government policy of nonintervention.

Exhibit 20A-1  Policy Alternatives Assume that the economy depicted in Panel (a) of Exhibit 20A-1 is in short-run equilibrium where AD equals SRAS₁. If the economy is left to correct itself according to classical theory:

When a household takes extra (unbudgeted) money on a trip, economists would classify this money as held for a(n):

Which type of demand for money causes the demand for money curve to slope downward?

The Keynesian cause-and-effect sequence predicts that an increase in the money supply will cause interest rates to:

According to the quantity theory of money, if an economy produces 100 units of output and has a money supply equal to $500, then if the money supply doubles while velocity remains constant, the new price level will:

If M stand for the money supply, V for the velocity of money, P for the average selling price, and Q for the output of goods and services, the equation of exchange is MV = PQ.

Exhibit 20-3  Money market demand and supply curves In Exhibit 20-3, assume an equilibrium with an interest rate of 15 percent and the money supply at $100 billion. The Fed uses its policy tools to move the economy to a new equilibrium at E₂ with money supply of $150 billion and an interest rate of 10 percent. This change could be the result of a(n):

Starting from equilibrium in the money market, suppose the money supply increases. Other things being equal, this will cause an excess demand for money, leading people to sell bonds.

The Keynesian cause-and-effect sequence predicts that a decrease in the money supply will cause interest rates to:

Exhibit 20A-2  Macro AD/AS Models As shown in Panel (b) of Exhibit 20A-2, assume the economy adopts a classical nonintervention policy. Which of the following would cause the economy to self-correct?

Exhibit 20-3  Money market demand and supply curves In Exhibit 20-3, assume an equilibrium at E₂ with the money supply at $100 billion and the interest rate at 15 percent. The Fed uses its policy tools to move the economy to a new equilibrium at E₁ with a money supply of 150 billion and an interest rate of 10 percent. As part of the adjustment to the new equilibrium, we would expect the:

In Keynes's view, an excess quantity of money demanded causes people to:

A decrease in the interest rate, other things being equal, causes a(n):

Monetarists argue that the Treasury's conduct of fiscal policy is the most important factor affecting real GDP and interest rates.

The monetary rule is the view of the:

According to the quantity theory of money:

Exhibit 20-2  Money market demand and supply curves Beginning from an equilibrium at E₁ in Exhibit 20-2, an increase in the money supply from $400 billion to $600 billion causes people to:

An increase in the supply of money, other things being equal, will raise the equilibrium interest rate.

Exhibit 20-4  Aggregate demand and supply model In Exhibit 20-4, which one of the following actions could the Fed use to shift the AD curve from AD₁ to AD₂?