Monetary Theory

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6B: Classical and Neoclassical Theories of Money

Business cycles tend to be relatively minor and are quickly and automatically cured so that the economy will return to its original full employment equilibrium according to: (a) the population dynamics theory. (b) psychological theories of the business cycle. (c) Joseph Schumpeter’s theory of creative destruction. (d) classical macroeconomic theory. (e) external shock theory.

A graph showing a positive relationship between the interest rate and the expected inflation rate would illustrate the: (a) Cambridge equation. (b) Friedman’s liquidity effect. (c) Fisher effect. (d) Laffer curve. (e) quantity theory of money.

Interest rates on given financial instruments tend to be higher the: (a) shorter the period to maturity. (b) lower the risk of default. (c) more liquid the asset is. (d) greater is the level of uncertainty about the real rate of interest that will be received. (e) lower is the face value at maturity relative to the current market price.

The effect on nominal interest rates of an increase in the rate of monetary growth that is least consistent with the other effects is the: (a) expected inflation [Fisher] effect. (b) nominal income effect. (c) liquidity [Keynes] effect. (d) price level effect.

1. The idea that growth of the money supply at a low fixed percentage rate annually is likely to yield greater macroeconomic stability than when monetary policy is at the discretion of government officials is the foundation for: (a) neoclassical macroeconomic theory. (b) John Maynard Keynes’s liquidity preference theory. (c) Irving Fisher’s natural rate of interest. (d) Abba Lerner’s wage-price reaction functions. (e) Milton Friedman’s monetary growth rule.

2. According to classical economists, Aggregate Demand primarily determines: (a) levels of national output and income. (b) total production in the economy. (c) Aggregate Supply at full employment. (d) the price level.

3. The income velocity of money in Irving Fisher’s equation of exchange is calculated as: (a) nominal money stock/nominal GDP. (b) nominal GDP/nominal money stock. (c) real money stock/real GDP. (d) mc2.

4. The demand for money would be negatively affected by increases in: (a) income (b) expected hikes in interest rates. (c) wealth. (d) uncertainty about future income. (e) expected inflation.

5. Classical macroeconomics views the cost of holding money as: (a) current interest rates. (b) profits from economic investment. (c) goods that could be purchased with the money. (d) hard to determine because of sticky pricing. (e) the percentage rate of inflation.

6. According to modern monetarists, short-run shocks to Aggregate Demand or Aggregate Supply: (a) are ignored. (b) are assumed away. (c) have no lasting effect on inflation or unemployment. (d) require active discretionary monetary policy.

7. According to the classical macroeconomic model, the: (a) demand for nominal money can be written as Md = kPQ, or Md = kPy. (b) price level depends primarily on velocity. (c) income velocity of money determines real output. (d) money supply determines real output. (e) government should run deficits to reduce unemployment.

8. According to the classical macroeconomic model: (a) output grows when the price level rises. (b) real output is unaffected by the money supply. (c) employment depends on the velocity of money. (d) growth of permanent income is impossible.

9. According to the Equation of Exchange: (a) MP=VQ. (b) MV=PQ. (c) price changes require velocity changes. (d) in the long run, we're all dead.

10. If the theory that money is neutral in the long run is correct, then: (a) exchange rates are unaffected by the relative growths of the money supplies of different countries. (b) interest rates are the only real economic variable affected by fiscal policy. (c) money illusion may be more significant in the long run than in the short run. (d) changes in the money...
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