Chapter 27.4

Question 1

) Refer to Figure 27-6. The famous debate from the the 1950s and 1960s between Keynesians and Monetarists centred around the slopes of the money demand and investment demand curves. The Keynesians believed
A) the diagrams in part (ii) were more realistic than those in part (i), and therefore fiscal policy was a more effective method of stimulating aggregate demand than monetary policy.
B) the diagrams in part (ii) were more realistic than those in part (i), and therefore monetary policy was a more effective method of stimulating aggregate demand than fiscal policy.
C) the diagrams in part (i) were more realistic than those in part (ii), and therefore fiscal policy was a more effective method of stimulating aggregate demand than monetary policy.
D) the diagrams in part (i) were more realistic than those in part (ii), and therefore monetary policy was a more effective method of stimulating aggregate demand than fiscal policy.

Answer 1

C

Question 2

Refer to Figure 27-6. The famous debate from the 1950s and 1960s between Keynesians and Monetarists centred around the slopes of the money demand and investment demand curves. The Monetarists believed
A) the diagrams in part (ii) were more realistic than those in part (i), and therefore fiscal policy was a more effective method of stimulating aggregate demand than monetary policy.
B) the diagrams in part (ii) were more realistic than those in part (i), and therefore monetary policy was a more effective method of stimulating aggregate demand than fiscal policy.
C) the diagrams in part (i) were more realistic than those in part (ii), and therefore fiscal policy was a more effective method of stimulating aggregate demand than monetary policy.
D) the diagrams in part (i) were more realistic than those in part (ii), and therefore monetary policy was a more effective method of stimulating aggregate demand than fiscal policy.

Answer 2

B

Question 3

The view of the Classical economists regarding the “neutrality of money” was that
A) the allocation of resources is independent of the distribution of income.
B) the distribution of income is independent of the allocation of resources.
C) the real part of the economy cannot affect the level of money prices.
D) the quantity of money has no effect on any real variables in the economy.
E) money is neutral in its effect on absolute prices in the economy.

Answer 3

D

Question 4

Which of the following best represents the view of the Classical economists regarding money?
A) Relative prices are determined by the money supply.
B) The monetary sector influences consumers’ preferences and relative prices.
C) The economy is composed of the real sector and the monetary sector, and the latter does not affect the former.
D) The distribution of income is affected by the money supply.
E) The allocation of resources is affected by the money supply

Answer 4

C

Question 5

According to the views of the Classical economists, if the money supply doubles,
A) money prices will double.
B) money prices will be halved.
C) relative prices will double.
D) real income will double.
E) there will be no effect on money prices.

Answer 5

A

Question 6

Classical economists’ belief in the “neutrality of money” led them to argue that
A) absolute prices were determined in the real part of the economy.
B) the allocation of resources was determined by the quantity of money and not by the forces of supply and demand.
C) relative prices have no role in the real allocation of resources.
D) a change in the quantity of money would not affect money prices or relative prices.
E) a change in the quantity of money would change the price level but would not change relative prices.

Answer 6

E

Question 7

Which of the following statements best describes the difference between the Classical and modern views regarding the role of money in the economy?
A) Both schools of thought accept the neutrality of money within the economy.
B) Unlike modern economists, Classical economists believed that the neutrality of money existed only in the long run.
C) Classical economists argued that relative prices are determined by the supply of money, while modern economists believe that the money supply will never affect relative prices.
D) Both Classical and modern economists accept the neutrality of money in the long run, but modern economists question neutrality in the short run.
E) Both Classical and modern economists accept the neutrality of money in the short run, but modern economists question neutrality in the long run.

Answer 7

D

Question 8

The long-run neutrality of money implies that
A) changes to the money supply have no effect on either the price level or real GDP.
B) changes to the money supply never have any effect on real GDP.
C) in response to any change in the money supply, the economy’s adjustment process will bring Y back to Y*, which is unaffected by the change in the money supply.
D) the economy’s level of potential output will adjust to accommodate any change in the money supply.
E) in response to any change in the money supply, the demand for money will adjust to cancel out its effects on all macroeconomic variables.

Answer 8

C

Question 9

The hypothesis in economics known as hysteresis is that
A) the economy’s adjustment process operates in response to an expansion of the money supply, but not a contraction.
B) changes in the money supply have a stronger influence on investment demand than do changes in fiscal policy.
C) the monetary transmission mechanism does not apply in an open-economy setting.
D) the role of money in the long run is neutral.
E) the path of real GDP in an economy can influence that economy’s level of potential output.

Answer 9

E

Question 10

Suppose changes in the money supply only affected the price level and never affected real GDP. If this were the case, it could be viewed as evidence
A) that the modern view of the neutrality of money is correct.
B) supporting both the Classical and modern views of the neutrality of money.
C) that both the Classical and modern views of the neutrality of money are incorrect.
D) that the Classical view of the neutrality of money is correct.
E) that has no bearing on the theories of either Classical or modern economists.

Answer 10

D

Question 11

Refer to Figure 27-5. This economy begins in equilibrium with M0S , M0D  and real GDP equal to potential GDP (with AD0  and  AS0). Now suppose there is an increase in the money supply to $540 billion. In the long run, after all adjustments have taken place, the money supply is \_\_\_\_\_\_\_\_, the interest rate is \_\_\_\_\_\_\_\_, the price level is \_\_\_\_\_\_\_\_, and real GDP is \_\_\_\_\_\_\_\_.
A) $500 billion; 2%; 100; $800 billion
B) $540 billion; 2%; 102; $805 billion
C) $500 billion; 4%; 104; $800 billion
D) $540 billion; 4%; 102; $795 billion
E) $540 billion; 4%; 104; $800 billion

Answer 11

E

Question 12

Refer to Figure 27-5. This economy begins in equilibrium with M0S , M0D and real GDP equal to potential GDP (with AD0 and AS0). Now suppose there is an increase in the money supply to $540 billion. In the long run, after all adjustments have taken place, what is the effect of the increase in the money supply? A) an increase in the price level to 102, and no change to any real economic variables
B) an increase in the price level to 104, and no change to any real economic variables
C) a decrease in the interest rate to 2% and an increase in the price level to 104
D) a decrease in the interest rate to 2%, an increase in potential GDP to $805 billion, and an increase in the price level to 102
E) a decrease in the interest rate to 2%, an increase in real GDP to $805 billion and an increase in the price level to 102

Answer 12

B

Question 13

Refer to Figure 27-5. This economy begins in equilibrium with M0S , M0D and real GDP equal to potential GDP (with AD0 and AS0). Now suppose there is an increase in the money supply to $540 billion. According to the Classical economists of the eighteenth and nineteenth centuries,
A) the neutrality of money holds in the long run, but in the short run changes in the money supply cause significant fluctuations of real GDP.
B) the neutrality of money holds in the long run, but in the short run changes in the money supply cause significant fluctuations in employment but not real GDP.
C) there is no connection between the “money” and “real” sides of the economy, and the only effect is a decrease in the interest rate.
D) there is no connection between the “money” and “real” sides of the economy, and the only effect is a rise in the price level.
E) such increases in the money supply cause long-run disequilibriums in the economy.

Answer 13

D

Question 14

The proposition of long-run neutrality of money is supported by evidence over more than fifty years and many countries that there is a positive relationship between
A) money supply growth and real GDP.
B) money supply growth and interest rates.
C) potential GDP and money supply growth.
D) inflation rates and interest rates.
E) inflation rates and money supply growth.

Answer 14

E

Question 15

Other things being equal, the steeper the AS curve for the economy, the
A) larger the impact on real output from any given increase in the money supply.
B) more sensitive the aggregate expenditure function to changes in the interest rate.
C) larger the impact on the price level from any given increase in the money supply.
D) less sensitive the aggregate expenditure function to changes in the interest rate.
E) smaller the impact on the price level from any given increase in the money supply.

Answer 15

C

Question 16

Other things being equal, the flatter the AS curve for the economy, the
A) smaller the impact on real output from any given increase in the money supply.
B) more sensitive the aggregate expenditure function to changes in the interest rate.
C) larger the impact on the price level from any given increase in the money supply.
D) less sensitive the aggregate expenditure function to changes in the interest rate.
E) smaller the impact on the price level from any given increase in the money supply.

Answer 16

E

Question 17

Consider the monetary transmission mechanism. Other things being equal, the steeper is the investment demand function, the
A) more responsive is desired investment to a change in the interest rate.
B) less responsive is desired investment to a change in the interest rate.
C) less responsive is the interest rate to a change in the money supply.
D) more responsive is the demand for money to a change in the interest rate.
E) less responsive is the demand for money to a change in the interest rate.

Answer 17

B

Question 18

Consider the monetary transmission mechanism. Other things being equal, the flatter is the investment demand function, the
A) more responsive is desired investment to a change in interest rates.
B) less responsive is desired investment to a change in interest rates.
C) less responsive is the interest rate to a change in the money supply.
D) more responsive is the demand for money to a change in interest rates.
E) less responsive is the demand for money to a change in interest rates.

Answer 18

A

Question 19

Consider the monetary transmission mechanism. If the Bank of Canada were to increase the money supply, we would expect a large increase in aggregate demand if the money demand function
A) and the investment demand function are relatively flat.
B) and the investment demand function are relatively steep.
C) is relatively flat and the investment demand function is relatively steep.
D) is relatively steep and the investment demand function is relatively flat.
E) remains the same and the investment demand function is steep.

Answer 19

D

Question 20

The effectiveness of monetary policy in bringing about changes in real GDP is enhanced when the
A) investment demand curve and money demand function are both relatively flat.
B) investment demand curve and money demand function are both relatively steep.
C) investment demand curve is relatively steep and the money demand function is relatively flat.
D) investment demand curve is relatively flat and the money demand function is relatively steep.
E) None of the above - monetary policy is always equally effective.

Answer 20

D

Question 21

Monetary policy can have the largest impact on desired aggregate expenditures when the
A) investment demand curve and money demand function are both relatively flat.
B) investment demand curve and money demand function are both relatively steep.
C) investment demand curve is relatively steep and the money demand function is relatively flat.
D) investment demand curve is relatively flat and the money demand function is relatively steep.
E) None of the above - monetary policy is always equally effective.

Answer 21

D

Question 22

Monetary policy will be least effective in changing aggregate demand when the
A) investment demand curve and money demand function are both relatively flat.
B) investment demand curve and money demand function are both relatively steep.
C) investment demand curve is relatively steep and the money demand function is relatively flat.
D) investment demand curve is relatively flat and the money demand function is relatively steep.
E) None of the above - monetary policy is always equally effective.

Answer 22

C

Question 23

Consider the monetary transmission mechanism. A relatively steep investment demand curve and a relatively flat money demand curve
A) make it impossible for the Bank of Canada to change the money supply.
B) increase the effectiveness of expansionary monetary policy.
C) imply that large increases in the money supply have little effect on aggregate expenditure.
D) make the money supply a particularly powerful policy instrument.
E) are believed by many monetarists to be realistic descriptions of the economy.

Answer 23

C