Economics: Principles and Policies, 9e: Chapter The Debate Over Monetary and Fiscal Policy

Chapter: The Debate Over Monetary and Fiscal Policy

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1. Following an anti-capitalist coup, Fredonia forces all citizens to turn in and stop using all credit cards. What is the most likely effect of this on velocity?: a. It will decrease.
b. It will increase.
c. It will remain constant.
d. Velocity is unrelated to credit cards.

2. The major limitation of both the Keynesian approach and the monetarist approach is that: a. both focus on the determination of interest rates to the exclusion of price levels.
b. both study the determination of real GDP equilibrium without including the price level.
c. both are ways of studying the aggregate demand curve, but to learn anything about the price level and output, the aggregate supply curve must be included in the analysis.
d. both concentrate on interest rates without considering changes in consumption or net exports.

3. Which of the following statements is true?: a. At higher interest rates, money circulates faster and V falls.
b. At higher interest rates, people find it more attractive to hold money, and, therefore, velocity falls.
c. At higher interest rates, people find it less attractive to hold money, and, therefore, velocity increases.
d. At higher interest rates, money circulates slower and V increases.

4. The more sensitive investment is to changes in interest rates, the: a. lower will be the MPC.
b. more the expenditure schedule will shift given a change in the money supply.
c. less the expenditure schedule will shift given a change in the money supply.
d. higher will be the MPC.

5. If investment spending is relatively insensitive to changes in the interest rate, then the most effective expansionary policy would be: a. a reduction in required reserves.
b. Fed purchases of government securities.
c. a personal income tax increase.
d. a personal income tax cut.

6. For which of the following is it possible to obtain the quickest decision to enact a policy?: a. Trade.
b. Money.
c. Taxes.
d. Government spending.

7. The figure below shows the equilibrium interest rate and the money stock (M) before the demand for money shifted to M₁D₁. If the Fed wants to return to the original quilibrium position (E), it should

a. increase the money supply so MS intersects M₁D₁ at Z.
b. decrease the money supply so MS intersects M₁D₁ at X.
c. leave the money supply alone and use persuasion on bankers to lower interest rates.
d. It is impossible for the Fed to restore the original equilibrium condition.

8. A contractionary monetary policy is most likely to reduce output with little impact on inflation when: a. the economy is near full employment and the aggregate supply curve is horizontal.
b. the economy is near full employment and the aggregate supply curve is vertical.
c. the economy has substantial unemployment and the aggregate supply curve is vertical.
d. the economy has substantial unemployment and the aggregate supply curve is horizontal.

9. According to Baumol and Blinder, the lag between the time a policy is implemented and the time it affects aggregate demand: a. is longer for fiscal than monetary policy.
b. is longer for monetary than fiscal policy.
c. is approximately equal for both.
d. is influenced mainly by the size of the multiplier.

10. It is often difficult to separate politics from economics. In general, monetarists tend to be: a. political liberals.
b. Marxists.
c. political conservatives.
d. deconstructionists.