Chapter 17
The Velocity Equation is...
V=(P x Y)/M
If P is the price level (the GDP deflator), Y is the quantity of output (real GDP), and M is the quantity of money
A sudden increase in business pessimism shifts the aggregate-________ curve, leading to ________ output.
a. demand; higher
b. supply; lower
c. demand; lower
d. supply; higher
c) Demand; Lower
_______=1/(1-MPC)
Money multiplier
True or False
As the price level increases, the value of money increases.
False
If the price level rises, the real value of a dollar _______.
a. falls, so people will want to buy more
b. falls, so people will want to buy less
c. rises, so people will want to buy more
d. rises, so people will want to buy less
falls, so people will want to buy less
An increase in the price level reduces the real value of a dollar and makes consumer less wealthy, which in turn reduces consumer spending.
Jason is a critic of stabilization policy. Which of the following statements would he not agree with?
a. There is a lag between the time a policy is passed and the time a policy has an impact on the economy.
b. The Fed should try to fine-tune the economy during times of economic fluctuations.
c. There is a lag between the time a policy is needed and the time it takes to be implemented.
d. Stabilization policy can be a source of, instead of a cure for, economic fluctuations.
B
Advocates of active stabilization policy say that changes in attitudes by households and firms shift aggregate demand and that, if the government does not respond, the result is undesirable and unnecessary fluctuations in output and employment. Advocates of more passive policy say that monetary and fiscal policy work with such long lags that attempts at stabilizing the economy often end up being destabilizing.
Which of the following is true about the inflation tax in the United States?
a. It falls most heavily on those who hold a lot of currency and account for a large share of U.S. government revenue.
b. It falls most heavily on those who hold little of currency and account for a large share of U.S. government revenue.
c. It falls most heavily on those who hold little of currency but accounts for a small share of U.S. government revenue.
d. It falls most heavily on those who hold a lot of currency but accounts for a small share of U.S. government revenue.
D
When the government prints money, the price level rises, and the dollars in your wallet are less valuable. Thus, the inflation tax is like a tax on everyone who holds money. Thus it is said that by printing money, the government levies an inflation tax. In the United States in recent years, the inflation tax has been a trivial source of revenue for the government.
Which of the following increases in response to the interest-rate effect from a decrease in the price level?
a. Neither investment nor consumption
b. Investment but not consumption
c. Consumption but not investment
d. Both investment and consumption
Both investment and consumption
Because of a fall in the price level, interest rates fall, which stimulates the demand for investment goods and for big-ticket consumption goods and services financed through borrowing
What is the theory of liquidity preference
Keynes’s theory that the interest rate adjusts to bring money supply and money demand into balance
According to the quantity theory of money, which variable in the quantity equation is most stable over long periods of time?
a. Money
b. Price level
c. Velocity
d. Output
C) Velocity
Velocity is the rate at which money changes hands.
"In many cases, it turns out that the velocity of money is relatively stable, at least compared with other economic variables."
The belief by most economists that real and nominal variables are essentially determined separately in the long run is characteristic of the ________ model.
a. classical
b. aggregate supply
c. aggregate demand
d. Keynesian
A
The classical model says that, in the long run, changes in the money supply affect the price level and other nominal variables but do not affect real GDP, unemployment, or other real variables
An increase in ________________ or a cut in taxes shifts the aggregate-demand curve to the right.
government purchases
fiscal policy
Ongoing inflation does not automatically reduce most people's incomes because ________.
a. people respond to inflation by holding less money
b. wage inflation goes together with price inflation
c. higher inflation lowers real interest rates
d. the tax code is fully indexed for inflation
B
Stagflation is caused by a ___________.
a. rightward shift in the aggregate-demand curve
b. leftward shift in the aggregate-demand curve
c. leftward shift in the aggregate-supply curved.
d. rightward shift in the aggregate-supply curve
c. leftward shift in the aggregate-supply curve
Stagflation:a period of falling output and rising prices
What is the most important automatic stabilizer?
The most important automatic stabilizer is the tax system. When the economy enters a recession, the government’s tax collections decline automatically because almost all taxes are closely tied to economic activity. Incomes, earnings, and profits all fall in a recession, the government’s tax revenue falls as well. This automatic tax cut stimulates aggregate demand and reduces the magnitude of economic fluctuations.