Multiple Choice Questions:
1. The P in the equation of exchange represents the
a. Profit earned in the economy.
b. Average level of prices of final goods and services in the economy.
c. Marginal level of prices.
d. Marginal propensity to spend.
2. The equation of exchange can be written as
a. M x P = V x Q.
b. M x V = P x Q.
c. M x Q = P x V.
d. Q x M = P x V.
3. If an economist divides the level of nominal GDP by the number of dollars in the money supply, she has computed?
a. The velocity of money.
b. The price level.
c. The level of real GDP.
d. The economic growth rate.
4. If nominal GDP is $3,200 billion and M1 is $800 billion, then velocity is
a. 0.5.
b. 2.
c. 4.
d. 8.
e. 400.
5. According to the simple quantity theory of money, a change in the money supply of 6.5 percent would, holding velocity constant, lead to?
a. A 6.5 percent change in real GDP.
b. A 6.5 percent change in nominal GDP.
c. A 6.5 percent change in velocity.
d. A 6.5 percent change in aggregate supply.
6. If people expect increasing inflation, what would be the expected reaction of velocity in the equation of exchange?
a. Velocity would be expected to remain the same.
b. Velocity would be expected to decrease.
c. Velocity would be expected to increase.
d. None of the above
7. If M increases and V increases?
a. Nominal GDP increases.
b. Nominal GDP decreases.
c. Nominal GDP stays the same.
d. The effect on nominal GDP is indeterminate.
8. If the velocity of money (V) and real output (Q) were increasing at approximately the same rate, then?
a. It would be impossible for monetary authorities to control inflation.
b. Monetary acceleration would not lead to inflation.
c. Inflation would be closely related to the long-run rate of monetary expansion.
d. Both a and b would be true.
9. Compared to fiscal policy, which of the following is an advantage of using monetary policy to attain macroeconomic goals?
a. It takes a long time for fiscal policy to have an effect on the economy, but the effects of monetary policy are immediate.
b. The effects of monetary policy are certain and predictable, while the effects of fiscal policy are not.
c. The implementation of monetary policy is not slowed down by the same budgetary process as fiscal policy.
d. The economists who help conduct monetary policy are smarter than those who help with fiscal policy.
10. An important limitation of monetary policy is that?
a. It is conducted by people in Congress who are under pressure to get reelected every two years.
b. When the Fed tries to buy bonds, it is often unable to find a seller.
c. When the Fed tries to sell bonds, it is often unable to find a buyer.
d. It must be conducted through the commercial banking system, and the Fed cannot always make banks do what it wants them to do.