Deck 15: The Debate over Monetary and Fiscal Policy

Question 1

The velocity of circulation is the number of times per year a dollar is spent.

Answer 1

True

Question 2

Data indicate that the velocity of M1 is greater than the velocity of M2.

Answer 2

True

Question 3

The equation of exchange states that the money value of GDP must be equal to the product of the money stock times its velocity.

Answer 3

True

Question 4

If velocity is a constant,then the equation of exchange is an economic model.

Question 5

The differences between monetarist and Keynesian theories are more apparent than real.

Question 6

If velocity remains relatively constant,changes in the money supply can have a predictable effect on nominal GDP.

Question 7

When salaries are paid more frequently,the velocity of money speeds up because individuals hold more cash.

Question 8

Expansionary monetary policy will decrease interest rates and decrease the velocity of money.

Question 9

The velocity of circulation has remained constant over long periods of time.

Question 10

The equation of exchange is M × Y = P × V.

Question 11

The equation of exchange is an accounting identity,not an economic theory.

Question 12

As individuals hold more of their financial assets in the form of money market accounts and mutual funds,the velocity of money will decrease.

Question 13

If the velocity of circulation is 10 and the money supply is $250,the value of transactions will be $25.

Question 14

Both M1 and M2 are monetary values much larger than nominal GDP.

Question 15

The substantial fluctuations in velocity make the equation of exchange more useful in predicting changes in nominal GDP.

Question 16

Over long periods of time,M2 velocity has been relatively constant.

Question 17

During the financial crisis of 2007-2009,both fiscal and monetary policy turned more expansionary.

Question 18

As the interest rate increases,the velocity of money will increase as well.

Question 19

The increased use of PayPal will decrease the velocity of money.

Question 20

Velocity is calculated as nominal GDP/money stock.

Question 21

Once the federal funds rate is reduced to zero,conventional restrictive monetary policy is no longer an option.

Question 22

Scatter diagrams of money growth rates and inflation rates between 1982 and 2010 show a clear relationship of cause and effect.

Question 23

As a result of the Fed's unconventional purchase of over $1 trillion of mortgage-backed securities in 2009,interest rates on both mortgage-backed securities and home mortgages increased.

Question 24

The monetary stimulus post-September 11,2001,achieved some desired effects within the year.

Question 25

The "Taylor rule" is an example of a fixed rule for making monetary policy.

Question 26

The Federal Reserve reduced the fed funds rate to the 0-0.25 percent range in 2008 in response to the Lehman Brother's catastrophe.

Question 27

Advocates of activist policy making point to the swift response of the Fed after September 11,2001,as an example of effective policy making.

Question 28

Critics of the Fed's unconventional policies in 2009 and 2010 argued that determining which financial institutions would be bailed out and which would be allowed to fail was a political decision that rightfully belonged to Congress.

Question 29

Although asset price bubbles seem obvious after the fact,it is much more difficult to draw such a conclusion before the fact.

Question 30

Most economists think that it is impossible to prevent asset price bubbles.

Question 31

The Federal Reserve has policy instruments that it can aim directly at a specific category of asset price bubble.

Question 32

More economists adopted monetarism in the early 1990s.

Question 33

The fiscal stimulus bills of 2001,2008,and 2009 were unusual examples of rapid implementation of fiscal policy.

Question 34

Policy lags are typically much shorter for monetary policy than for fiscal policy.

Question 35

On a steeply sloped aggregate supply curve,monetary policy will affect primarily output.

Question 36

Advocates of fixed rules believe that politicians focus more on re-election than on sound policy.

Question 37

The longer and more unpredictable that the policy lags are,the stronger the case for active stabilization policy.

Question 38

Once the federal funds rate is reduced to zero,conventional expansionary monetary policy is no longer an option.

Question 39

After September 11,2001,a small group of economists argued that the economy's self-correcting mechanism would work to counteract the recessionary effects of the attack.

Question 40

Whether prices or real GDP exhibit the greater response to increased aggregate demand depends on the degree of capacity utilization in the economy.

Question 41

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.

Question 42

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.

Question 43

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

Question 44

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.

Question 45

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.

Question 46

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.

Question 47

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.

Question 48

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.

Question 49

The equation M × V = P × Y is called the

A) multiplier formula.
B) transactions formula.
C) equation of exchange.
D) balanced exchange formula.

Question 50

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.

Question 51

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.

Question 52

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.

Question 53

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)

Question 54

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.

Question 55

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

Question 56

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.

Question 57

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.

Question 58

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.

Question 59

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.

Question 60

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.

Question 61

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.

Question 62

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.

Question 63

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.

Question 64

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.

Question 65

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.

Question 66

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.

Question 67

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.

Question 68

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.

Question 69

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.

Question 70

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.

Question 71

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.

Question 72

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.

Question 73

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.

Question 74

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.

Question 75

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.

Question 76

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.

Question 77

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.

Question 78

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.

Question 79

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.

Question 80

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.