Question 1

Why is it important which monetary aggregate we choose when testing the stability of velocity?

Accepted Answer

Suppose that there were large shifts of assets from accounts that are in both M1 and M2 to accounts which are only in M2. All other things being equal this would imply an increase in the velocity of money. However, if we chose M2 to measure velocity (with no change in GDP) then velocity would not change at all.

Question 2

What did supply-side economics argue was the real problem with the U.S. economy and what was its prescription?

Accepted Answer

Supply-siders argued that high rates of taxation and heavy regulation had reduced the incentive to work, to save, and to invest. What was needed was better incentives to stimulate supply.

Question 3

Assume the Fed increases money supply. In this case, what would the time lag problem of monetary policy due to velocity in the short run.

Accepted Answer

It will decrease the velocity of money in the short run.

Question 4

What did early economists (i.e. before Keynes) believe about the velocity of money and why did they believe it?

Accepted Answer

Early economists believed that the veloc

Question 5

Write out the equation for the income velocity of money and identify each term.

Accepted Answer

V = GDP M GDP is gro

Question 6

Assume that the economy is represented by the following function Y = $9 Trillion + $500 billion (P - Pe). If the current price level is 1.0 and people expect it to rise to 1.2 what will be the new level of GDP if the price level only rises to 1.1?

Accepted Answer

The level of GDP = $

Question 7

What do Monetarists believe output is determined by?.

Accepted Answer

Monetarists believe

Question 8

Suppose that an increase in the money supply today of 5 percent increases GDP one year from now by precisely 5 percent. How would this time lag effect the empirical measurement of velocity?

Accepted Answer

If we measure the ratio of today's GDP t

Question 9

In 1994 the velocity of money = 3 and the Money Supply = $700 billion. Based on this information answer the following questions. Assume 1994 is the base year.
(a) What are the values of nominal and real GDP for 1994?
(b) If the money supply increases 10% in 1995, what is the effect on nominal GDP, assuming the velocity is constant?
(c) Using the same data from Part (b), if the velocity of money also changes from 3 to 2, now what is the effect on GDP?

Accepted Answer

(a) M V = GDP (nominal), thus $700 3 =

Question 10

If the equation for the quantity theory of money is looked on as a demand-for-money equation, then what does the demand for money depend on? What about the interest rate?

Accepted Answer

We can conclude that

Question 11

Contrast the views of Monetarists and Keynesians regarding wage changes.

Accepted Answer

They disagree on the speed at

Question 12

Evaluate the following situations, given a Lucas supply function where Y = 200 + 75(P - Pe), the current price level is 2, and the expected price level is 2.
(a) What happens to output when sudden oil shortages cause the price to increase from 2 to 2.5?
(b) The Federal Reserve was expected to enact a new policy that would have increased the price level from 2 to 2.4, but due to unexpected shocks the price level increased to 2.8. With these changes, what is the effect on output?
(c) The news media found unreported information that inflation would increase considerably under a recent fiscal policy package. What is the effect on output if the media reports to the public that, with this fiscal policy approach, inflation is expected to increase to a level of 3?

Accepted Answer

(a) Y = 200 + 75(2.5- 2). Y = $237.5 bi

Question 13

What is the principle idea surrounding the Keynesian view of labor markets?

Accepted Answer

The principle idea i

Question 14

If firms have rational expectations and if they set prices and wages on this basis, then on average what should be true about prices and wages?

Accepted Answer

If firms have rational expecta

Question 15

How is it that rational-expectations theory concludes that on average there will be no unemployment?

Accepted Answer

When a firm has rational expectations, i

Question 16

Draw the Laffer Curve and explain its shape.

Accepted Answer

The assumption behind this curve is that

Question 17

Explain the impact on real output of a monetary policy change that is announced to the public. Assume rational expectations.

Accepted Answer

If the policy change is announced to the

Question 18

If tax rates are cut so that people have an increased incentive to work and businesses have an increased incentive to invest, what will be the impact on aggregate supply, aggregate output and the price level?

Accepted Answer

Aggregate supply wil

Question 19

Use the Economics in Practice titled "How are Expectations Formed?" to answer the following question. What are the two factors that the British economists discovered are important in how consumers form inflationary expectations? What does this suggest vis-à-vis concerning what economics theorists believe to be true about how consumers form their expectations?

Accepted Answer

Two factors that appear to be important

Question 20

What does the empirical evidence seem to suggest about the connection between the demand for money and the interest rate?

Accepted Answer

When demand-for-money equation

Why is it important which monetary aggregate we choose when testing the stability of velocity?

What did supply-side economics argue was the real problem with the U.S. economy and what was its prescription?

Assume the Fed increases money supply. In this case, what would the time lag problem of monetary policy due to velocity in the short run.

What did early economists (i.e. before Keynes) believe about the velocity of money and why did they believe it?

Write out the equation for the income velocity of money and identify each term.

Assume that the economy is represented by the following function Y = $9 Trillion + $500 billion (P - P^e). If the current price level is 1.0 and people expect it to rise to 1.2 what will be the new level of GDP if the price level only rises to 1.1?

What do Monetarists believe output is determined by?.

Suppose that an increase in the money supply today of 5 percent increases GDP one year from now by precisely 5 percent. How would this time lag effect the empirical measurement of velocity?

If the equation for the quantity theory of money is looked on as a demand-for-money equation, then what does the demand for money depend on? What about the interest rate?

Contrast the views of Monetarists and Keynesians regarding wage changes.

What is the principle idea surrounding the Keynesian view of labor markets?

If firms have rational expectations and if they set prices and wages on this basis, then on average what should be true about prices and wages?

How is it that rational-expectations theory concludes that on average there will be no unemployment?

Draw the Laffer Curve and explain its shape.

Explain the impact on real output of a monetary policy change that is announced to the public. Assume rational expectations.

If tax rates are cut so that people have an increased incentive to work and businesses have an increased incentive to invest, what will be the impact on aggregate supply, aggregate output and the price level?

What does the empirical evidence seem to suggest about the connection between the demand for money and the interest rate?

The Scope and Method of Economics

The Economic Problem: Scarcity and Choice

Demand, Supply, and Market Equilibrium

Demand and Supply Applications

Introduction to Macroeconomics

Measuring National Output and National Income

Unemployment, Inflation, and Long-Run Growth

Aggregate Expenditure and Equilibrium Output

The Government and Fiscal Policy

The Money Supply and the Federal Reserve System

Money Demand and the Equilibrium Interest Rate

The Determination of Aggregate Output, the Price Level, and the Interest Rate

Policy Effects and Costs Shocks in the Asad Model

The Labor Market in the Macroeconomy

Financial Crises, Stabilization, and Deficits

Household and Firm Behavior in the Macroeconomy: a Further Look

Long-Run Growth

International Trade, Comparative Advantage, and Protectionism

Open-Economy Macroeconomics: the Balance of Payments and Exchange Rates

Economic Growth in Developing and Transitional Economies

Filters

Exam 18: Alternative Views in Macroeconomics

Why is it important which monetary aggregate we choose when testing the stability of velocity?

What did supply-side economics argue was the real problem with the U.S. economy and what was its prescription?

Assume the Fed increases money supply. In this case, what would the time lag problem of monetary policy due to velocity in the short run.

What did early economists (i.e. before Keynes) believe about the velocity of money and why did they believe it?

Write out the equation for the income velocity of money and identify each term.

Assume that the economy is represented by the following function Y = $9 Trillion + $500 billion (P - Pe). If the current price level is 1.0 and people expect it to rise to 1.2 what will be the new level of GDP if the price level only rises to 1.1?

What do Monetarists believe output is determined by?.

Suppose that an increase in the money supply today of 5 percent increases GDP one year from now by precisely 5 percent. How would this time lag effect the empirical measurement of velocity?

If the equation for the quantity theory of money is looked on as a demand-for-money equation, then what does the demand for money depend on? What about the interest rate?

Contrast the views of Monetarists and Keynesians regarding wage changes.

What is the principle idea surrounding the Keynesian view of labor markets?

If firms have rational expectations and if they set prices and wages on this basis, then on average what should be true about prices and wages?

How is it that rational-expectations theory concludes that on average there will be no unemployment?

Draw the Laffer Curve and explain its shape.

Explain the impact on real output of a monetary policy change that is announced to the public. Assume rational expectations.

If tax rates are cut so that people have an increased incentive to work and businesses have an increased incentive to invest, what will be the impact on aggregate supply, aggregate output and the price level?

What does the empirical evidence seem to suggest about the connection between the demand for money and the interest rate?

The Scope and Method of Economics

The Economic Problem: Scarcity and Choice

Demand, Supply, and Market Equilibrium

Demand and Supply Applications

Introduction to Macroeconomics

Measuring National Output and National Income

Unemployment, Inflation, and Long-Run Growth

Aggregate Expenditure and Equilibrium Output

The Government and Fiscal Policy

The Money Supply and the Federal Reserve System

Money Demand and the Equilibrium Interest Rate

The Determination of Aggregate Output, the Price Level, and the Interest Rate

Policy Effects and Costs Shocks in the Asad Model

The Labor Market in the Macroeconomy

Financial Crises, Stabilization, and Deficits

Household and Firm Behavior in the Macroeconomy: a Further Look

Long-Run Growth

International Trade, Comparative Advantage, and Protectionism

Open-Economy Macroeconomics: the Balance of Payments and Exchange Rates

Economic Growth in Developing and Transitional Economies

Filters

Assume that the economy is represented by the following function Y = $9 Trillion + $500 billion (P - P^e). If the current price level is 1.0 and people expect it to rise to 1.2 what will be the new level of GDP if the price level only rises to 1.1?