Chapter 14 Money and the Economy

The ___________ is the change in the interest rate due to a change in Real GDP

income effect

The real interest rate is equal to the

nominal interest rate minus the expected inflation rate

The simple quantity theory of money predicts that changes in

the money supply lead to strictly proportional changes in the price level

Continued inflation in the real world is most likely caused by continued ________________ in aggregate ___________

increases, demand

In the monetarist version of the AD-AS framework, starting from long-run equilibrium, a decrease in the money supply will

lead to a decrease in Real GDP and the price level in the short run, and no change in Real GDP in the long run

A vertical aggregate supply curve in the short run is associated with the

simple quantity theory of money

The money supply falls from $2,200 billion to $1,960 billion. According to the simple quantity theory of money, the price level will decline by approximately __________ percent

10.9

According to monetarists, velocity is _______________________ and output is ________________________.

not constant, not constant

If the money supply is $8,000, velocity is 6, and Real GDP is 12,000 units of output, then the price level is _____________. If the money supply doubled over a short time period to $16,000, the simple quantity theory of money would predict that the price level would

$4, rise to $8

One-shot inflation can be caused by a

rightward shift of the AD curve or a leftward shift of the SRAS curve.

According to the simple quantity theory of money in the AD-AS framework, when the money supply increases, the result is _________________ in the price level and _______________________ in Real GDP

an increase, no change

When the Fed purchases government securities on the open market, reserves in the banking system ____________________ which __________________ the supply of loanable funds, pushing the interest rate _______________________. This concept is known as the ___________________ effect

rise, increases, downward, liquidity

According to the equation of exchange, the money supply multiplied by velocity is equal to

GDP

Can a one-time increase in the supply of money cause one-shot inflation?

Yes, because it shifts the aggregate demand curve rightward

The change in the interest rate that results from a change in Real GDP is known as the ________________ effect

income

According to the simple quantity theory of money, a 5 percent increase in the money supply will lead to a 5 percent

increase in GDP

Which of the following factors can change continually in such a way as to bring about continued increases in aggregate demand

the money supply

According to the equation of exchange, inflation will result from which of the following, ceteris paribus

an increase in the money supply

In the simple quantity theory of money, the aggregate supply curve is ____________ because ___________ is assumed to be ____

vertical, Real GDP, constant

With which of the following statements would a Monetarist agree

Aggregate demand depends on the money supply and velocity

According to the simple quantity theory of money in the AD-AS framework, when the money supply increases, the __________ curve shifts to the __________.

AD, right

The ___________ is the change in the interest rate due to a change in the supply of loanable funds.

liquidity effect

Suppose that Real GDP is $5,000, the money supply is $3,000, and velocity is 2. It follows that the price level is

1.20

Which is not part of the monetarist view of the economy

Changes in velocity and the money supply will change only the price level in the short run but will change only Real GDP in the long run

The expectations effect describes how a change in the __________________ leads to a change in the _________________

expected inflation rate, interest rate

The liquidity effect is the

decrease in the interest rate due to an increase in the supply of loanable funds that is brought about, in many cases, by a Fed action to increase the money supply

Suppose that the economy starts out in long-run equilibrium and then the Fed increases the money supply. According to monetarists, the AD curve will then shift __________________. The result will be a(n) _________________ in Real GDP and a(n) __________________ in the price level. Monetarists ______________________

rightward; increase; increase; believe that the economy is self-regulating, so over time Real GDP will adjust back to the level of Natural Real GDP

A ___________ in the money supply, a ___________ in velocity, or a ________ in Real GDP will cause the price level to decline

decline, decline, rise

If the money supply is $750 and velocity is 5 then, based on the equation of exchange, GDP is

$3,750

If the nominal interest rate is 8 percent and the real interest rate is 5.4 percent then the expected inflation rate must be

2.6 percent

If continued inflation were the result of continued decreases in SRAS, we would expect to see

a continued decrease in Real GDP.

Which of the following statements is true based on the simple quantity theory of money

since the velocity of money is assumed to be constant, only changes in the money supply can shift the AD curve

Based on the equation of exchange, which of the following is most likely to bring about inflation, ceteris paribus

an increase in the money supply

Based upon the equation of exchange, GDP divided by the money supply is equal to

velocity

What is the likely result of dramatic increases in the money supply in a country which regularly imposes and maintains price ceilings on goods and services, assuming that the market prices of these products are above the price ceilings

shortages of goods and services and the use of nonprice rationing devices

Nobel Laureate Milton Friedman said, "Continued inflation is always and everywhere a monetary phenomenon." If Friedman's statement is true, then

the cause of continued inflation is most likely to be continued increases in the money supply

In the Simple Quantity Theory of Money, the aggregate supply curve is ______________ at _________________

vertical, a given level of Real GDP

Velocity is equal to

GDP divided by the money supply.

Suppose that the nominal interest rate is 8 percent and the real interest rate is 6 percent. What is the expected inflation rate?

2 percent

Suppose the economy starts off producing Natural Real GDP. Next, aggregate demand rises, ceteris paribus. Monetarists would assert that, as a result, the price level ________in the short run. In the long run, when the economy has moved back to producing Natural Real GDP, the price level will be _________ than it was in short run equilibrium

rises, higher

Changes in the money supply can affect

many different economic variables, including Real GDP, the price level, and the supply of loans

When the Fed conducts an open market purchase, the interest rate ______________ as a result of a(n) __________________ in the supply of loanable funds

decreases, increase

Suppose that the price level is 4.5, the money supply is $4,000, and velocity is 1.5. It follows that Real GDP is approximately

$1,333

If GDP is $4,000 billion and the money supply is $400 billion, it follows that

velocity is 10

Continued inflation occurs

if there is a continued or sustained increase in the price level.

The real interest rate is 4 percent, if the nominal interest rate is _______________ and the expected inflation rate is _____________.

2 percent, −2 percent