Deck 9: The Monetarist Counterrevolution

Question 1

In the Monetarist model,the long-run holds when

A)the money supply is constant.
B)real wages are constant.
C)output is constant.
D)the expected price level equals the actual price level.
E)none of the above.

Answer 1

D

Question 2

The difference between the monetarist and Keynesian views on discretionary monetary policy is that the monetarists

A)believe monetary policy is a stabilizing force and Keynesians believe it is primarily destabilizing.
B)Keynesians think that monetary policy is always used effectively.
C)believe monetary policy is a destabilizing force and Keynesians believe it is potentially stabilizing.
D)favor "fine tuning" the economy by use of monetary policy while the Keynesians do not.

Answer 2

C

Question 3

Keynes and many of his contemporaries believed that money was

A)major importance because the idea of the liquidity trap only came later.
B)even more important than fiscal policy.
C)little importance and monetary policy of little use as a stabilization tool.
D)major importance but of little use as a stabilization tool.
E)none of the above.

Answer 3

C

Question 4

Compare and contrast the Monetarist theory of money demand curve with the Keynesian theory of money demand.Specifically,make sure to talk about how each model views the behavior of velocity over the business cycle.

Question 5

In the modern Keynesian model,velocity

A)varies positively with the level of the interest rate but not with income.
B)varies positively with the level of the interest rate and with income.
C)is constant.
D)varies in the short run but is constant in the long run.
E)none of the above

Question 6

Which of the following is not a possible source of instability in velocity in the Monetarist model?

A)financial innovation.
B)changes in monetary policy
C)changes in interest rates
D)credit cards.

Question 7

Milton Friedman and others view the instability of velocity in the 1980s as the result of a number of one-time events during that decade.What were these events?

Question 8

Compare and contrast the monetarist and Keynesian views to the inherent stability/instability of the economy.How do these views inform their opinions about the use of discretionary policy?

Question 9

What do Monetarists believe about the slope of the IS and LM curves and why? What do these beliefs imply about the effectiveness of monetary policy.

Question 10

Compare and contrast the long-run and short-run effects of a permanent increase in the rate of money growth in the Monetarist model.

Question 11

What do Keynesians believe caused the Great Depression?

Question 12

What do Keynesians believe about the slope of the money demand curve and why? What do these beliefs imply about the effectiveness of monetary policy.

Question 13

The classical and Monetarist models agree that

A)the use of fiscal policy can stabilize output.
B)money demand is inherently unstable.
C)the public has perfect information about the price level.
D)increases in the money supply are the primary cause of inflation.
E)none of the above

Question 14

Keynesians argue that the interest elasticity of the demand for money is

A)low,while monetarists say it is high.
B)unimportant in terms of affecting economic activity,while monetarists disagree.
C)relatively high,while monetarists argue it is low.
D)not a factor in determining if velocity is stable or unstable.

Question 15

The monetarists would expect a tax cut to have a strong effect on output only if the spending increase was

A)financed by a sale of bonds.
B)financed by a cut in government spending.
C)financed by an increase in the money stock.
D)accompanied by a reduction in the deficit.

Question 16

Keynesians believe that the interest elasticity of money demand

A)is lower than that believed by monetarists.
B)is higher than suggested by monetarists.
C)is completely elastic.
D)is completely inelastic.
E)none of the above.

Question 17

During the Great Depression,the money supply fell by more than 25%.Explain this fact and the role it played in the Great Depression from the Monetarist and Keynesian perspectives.

Question 18

In the Monetarist model,how long is the long-run? How does the transition between the long run and the short run take place?

Question 19

If interest rates rise,then velocity should ____ in the Keynesian model and _____ in the Monetarist model.

A)rise; fall.
B)stay the same,stay the same.
C)rise,stay the same.
D)fall; rise.
E)none of the above

Question 20

If interest rates rise,what happens to the price of bonds on the secondary market? How does this fact affect the demand for money and velocity in the Monetarist and Keynesian models?

Question 21

The Monetarist model differs from the classical model in that

A)changes in aggregate demand,not aggregate supply,drive changes in output.
B)changes in the money supply drive changes in inflation inflation.
C)changes in aggregate supply,not aggregate demand,drive changes in ouput.
D)money demand is not always stable.
E)none of the above.

Question 22

Friedman and others view changes in velocity as the result of changes in

A)income.
B)who is the chairman of the Federal Reserve.
C)interest rates.
D)inflation.

Question 23

Monetarists emphasize

A)crowding-out but not the liquidity trap.
B)crowding-out and the liquidity trap.
C)the liquidity trap but not crowding-out.
D)neither crowding-out nor the liquidity trap.

Question 24

According to the monetarist view,the

A)IS schedule is quite flat; hence,reflecting a high interest elasticity of aggregate demand.
B)IS schedule is quite steep; hence,reflecting a high interest elasticity of aggregate demand.
C)LM schedule is quite flat; hence,reflecting a high interest elasticity of money demand.
D)IS schedule is almost vertical; hence,reflecting a very low interest elasticity of money demand.

Question 25

Monetarists assume that people form their expectations only by

A)looking forwards
B)looking backwards.
C)using all available information.
D)using publicly available forecasts.

Question 26

According to the monetarists,the ratio of nominal GDP to the money stock should be

A)highly unstable in short run and in long run.
B)unstable only during recession.
C)unstable only in the long run.
D)quite stable in the short run and the long run.
E)unstable only if the LM curve shifts.

Question 27

Since the 1980s,

A)monetarism reached its peak.
B)the influence of the monetarists and Keynesians both eroded.
C)monetarism re-established itself with a stable money/income relationship.
D)monetarism declined in influence as Keyesian thought overtook it in influence.

Question 28

If the Fed followed through on plans to be more open to and more quickly provide the public with information about monetary policy,then we would expect to see

A)the impact of the money supply on output would get stronger.
B)the Fed would not have any power over output in the future.
C)the impact of the money supply on output would get weaker.
D)information does not affect output.

Question 29

The experience of the United States and other industrialized countries in the 1930s contradicts the classical view of the labor market where the money wage adjusts quickly to maintain full employment.On this issue

A)the Keynesians agree but the monetarists disagree.
B)the monetarists agree but the Keynesians do not agree.
C)both the Keynesians and monetarists are in agreement.
D)neither the Keynesians nor the monetarists agree.

Question 30

Monetarists believe in all of the following except

A)steady growth in inflation will yield stable output.
B)steady growth in the money supply will yield stable output.
C)fluctuations in the money supply are responsible for business cycles.
D)the Fed should not be involved in trying to stabilize the economy.

Question 31

Early Keynesians concluded that the quantity of money was not important because they assumed

A)low interest elasticity of money demand and high interest elasticity of the demand for output.
B)high interest elasticity of money demand and low interest elasticity of the demand for output.
C)high interest elasticity of money demand and high interest elasticity of the demand for output.
D)both low interest elasticity of money demand and of the demand for output.

Question 32

According to the Monetarists,the real effect of monetary policy on output is

A)long-lasting and unpredictable.
B)predictable and beneficial.
C)nonexistent in the short run.
D)always less than fiscal policy

Question 33

According to the second monetarist proposition,which of the following factors do not determine the level of real output in the long run?

A)The stock of capital goods
B)The size of the labor force
C)The quality of the labor force
D)The state of technology
E)The quantity of money

Question 34

Both the classical and monetarist models assume all of the following except

A)perfectly flexible prices.
B)perfectly flexible wages.
C)perfect information.
D)vertical aggregate supply curve in the long-run.

Question 35

Which of the following is correct? Whenever the monetary authority pegs the interest rate,

A)it must be ready to adjust the interest rate on demand.
B)the monetary authority must exchange money for bonds on demand.
C)it has control of the quantity of money.
D)None of the above

Question 36

If the central bank targets interest rates,then the LM curve is

A)vertical.
B)horizontal.
C)upward sloping.
D)downward sloping.

Question 37

The monetarist explanations of the Great Depression focus on

A)falls in the LM curve and aggregate demand.
B)falls in aggregate supply.
C)fall in the IS curve and aggregate demand..
D)falls in expectations and the expected price level.

Question 38

How can the Cambridge equation be restated according to Friedman's money demand theory?

A)M^d = k(r_B,r_E,r_D)Py
B)M^d = k/Py(r_B,r_E,r_D)
C)M^d = Py/k(r_B,r_E,r_D)
D)M^d = (r_B,r_E,r_D)Py/k

Question 39

Targeting money growth will lead to stable output growth only if

A)money demand and velocity change proportionally with output.
B)fiscal policy remains unchanged.
C)money demand and velocity are stable.
D)the IS curve is steep.

Question 40

According to monetarists,

A)businesses and households are the primary source of instability in the economy.
B)the Federal Reserve causes instability in the economy primarily by allowing instability in the money demand that determines the level of economic activity.
C)the government can stabilize the economy by interfering with the normal misadjustment mechanisms in the private sector.
D)All of the above
E)None of the above

Question 41

According to the early Keynesians,

A)the money demand function was unstable; the interest elasticity of money demand was extremely high; and,as a consequence,changes in the quantity of money did not have important predictable effects on the level of economic activity.
B)the money demand function was stable; the interest elasticity of money demand was low; and,as a consequence,changes in the quantity of money did not have important predictable effects on the level of economic activity.
C)the money demand function was unstable; the interest elasticity of money demand was low; and,therefore,changes in the quantity of money did not have important effects on the level of economic activity.
D)the money demand function was stable; the interest elasticity of money demand was high; and,therefore,changes in the quantity of money did have important effects on the level of economic activity.

Question 42

Monetarist and Keynesian theories of money demand differs in that

A)Monetarists assumes that the demand for money is highly inelastic while Keynes assumes money demand is elastic.
B)Monetarists assumes that the money demand function is highly stable while Keynes assumes it is unstable.
C)Monetarists assumes that there is only a transactions demand for money while Keynes also considers the precautionary and speculative demands for money.
D)Monetarists assume that the proportion of income held in theform of money is constant while Keynes believes it varies.
E)all of the above.

Question 43

The Keynesians believe that

A)the Fed played a primary role in driving the Great Depression.
B)the Fed played an important role in preventing the Great Depression from being worse than it could have been.
C)the Fed played a negative but secondary role in the Great Depression.
D)the Federal Reserve did all it could to prevent the Great Depression but essentially played no role in it.

Question 44

Keynesians view changes in velocity as the result of changes in

A)income.
B)expectations.
C)interest rates.
D)inflation.
E)all of the above.

Question 45

In the Keynesian model,and expected increase in the interest rate

A)increases the demand for bonds and the demand for money.
B)increases the demand for bonds and the demand for stocks.
C)decreases the demand for bonds and increases the demand for money.
D)increases the demand for bonds and decreases the demand for money.

Question 46

According to the monetarists,the rise in (M1)velocity in the mid-1990s can be attributed to

A)changes in the type of bank deposits that are available to the public.
B)new legal ceilings imposed on the deposit rates financial institutions are permitted to pay depositors.
C)the phasing out of legal ceilings on the deposit rates financial institutions are allowed to pay depositors.
D)Both a and b
E)Both a and c

Question 47

If the central bank targets a rate of nominal GDP growth,then it would have to _____ money growth when nominal GDP fell below its target in order to _____ inflation and ____ real GDP.

A)increase; increase; increase
B)increase; decrease; decrease
C)decrease; decrease; decrease
D)decrease; decrease; increase

Question 48

The monetarists believe that the LM schedule

A)and the IS schedule are both steep.
B)is flat while the IS schedule is steep.
C)and the IS schedule are both quite flat.
D)is steep and the IS schedule is relatively flat.

Question 49

_____ believe that the primary causes of the Depression were autonomous declines in aggregate demand initiated by shocks to the IS curve

A)Monetarists.
B)classical economists.
C)early and late Keynesians.
D)early Keynesians only.

Question 50

In the monetarist model,an increase in both government spending and taxes would

A)lead to a large increase in interest rates.
B)increase income dollar for dollar with the increase in government spending.
C)have a much smaller impact on income than in the Keynesian model.
D)all of the above.

Question 51

A liquidity trap is

A)the vertical portion of the LM schedule.
B)the horizontal portion of the LM schedule.
C)a situation where a given change in the money stock induces a large reduction in the interest rate.
D)Both a and c
E)Both b and c

Question 52

The third monetarist proposition asserts that in the short run,

A)changes in money demand are the dominant factor causing cyclical movements in output and employment.
B)money supply is only one of many factors resulting in cyclical movements in output and employment.
C)money primarily influences the price level and other nominal magnitudes.
D)None of the above

Question 53

A monetarists would expect an increase in government spending to have a strong effect on output only if the spending increase was

A)financed by an increase in the money supply.
B)financed by a sale of bonds.
C)financed by an increase in taxes.
D)accompanied by a higher in the deficit.

Question 54

Monetarists argue that the interest elasticity of the demand for money is

A)low,while Keynesians say it is high.
B)important in terms of affecting economic activity.
C)highly variable.
D)an important factor in determining if velocity is stable or unstable.