Q: If the money supply ($$M) is$$ $$2$$ trillion, the price level ($$P) is$$ $$1.5$$, and real output ($$Y) is$$ $$4$$ trillion, what is the velocity of money ($$V$$)?

$$V = \frac{P \times Y}{M} = \frac{1.5 \times 4}{2} = 3$$

Question 1

Suppose the Federal Reserve wants to increase the money supply. Which of the following actions would it most likely take?

Accepted Answer

Buy U.S. Treasury securities in the open market

Question 2

Which of the following best describes the wealth effect as it relates to the aggregate demand curve?

Accepted Answer

A higher price level decreases the real value of household wealth, leading to lower consumption

Question 3

If the required reserve ratio ($$RR) is 20$$%, what is the simple deposit multiplier?

Accepted Answer

$$\frac{1}{0.2} = 5$$

Question 4

Which of the following would cause a shift to the right in the short-run aggregate supply (SRAS) curve?

Accepted Answer

A positive technological shock that increases productivity

Question 5

According to the quantity theory of money, if the money supply grows at 8% per year, real GDP grows at 3% per year, and velocity is constant, what is the inflation rate?

Accepted Answer

5%

Question 6

Which of the following is NOT a function of money?

Accepted Answer

Source of economic growth

Question 7

If the aggregate demand curve shifts to the left, which of the following is most likely to occur in the short run?

Accepted Answer

Unemployment increases and inflation decreases

Question 8

Which of the following best explains why fiat money has value?

Accepted Answer

It is accepted by households and firms as long as they have confidence it will retain value

Question 9

A supply shock, such as a sudden increase in oil prices, will most likely cause which of the following in the short run?

Accepted Answer

A leftward shift of the SRAS curve, leading to higher prices and lower output

Question 10

If the Federal Reserve lowers the discount rate, what is the most likely immediate effect on the money supply?

Accepted Answer

The money supply increases as banks are encouraged to borrow more and make more loans

Question 11

Which of the following is included in the M1 definition of the money supply?

Accepted Answer

Checking account deposits

Question 12

Suppose the U.S. dollar appreciates relative to foreign currencies. What is the most likely effect on U.S. net exports and aggregate demand?

Accepted Answer

Net exports decrease, shifting AD to the left

Question 13

Which of the following best describes the process of securitization?

Accepted Answer

Transforming loans or other financial assets into securities that can be traded

Question 14

If the money supply ($$M) is$$ $$2$$ trillion, the price level ($$P) is$$ $$1.5$$, and real output ($$Y) is$$ $$4$$ trillion, what is the velocity of money ($$V$$)?

Accepted Answer

$$V = \frac{P 	imes Y}{M} = \frac{1.5 	imes 4}{2} = 3$$

Question 15

Which of the following is a likely consequence of hyperinflation?

Accepted Answer

People try to spend money as quickly as possible before it loses value

Question 16

In the dynamic aggregate demand and aggregate supply model, what is the usual cause of inflation over time?

Accepted Answer

Aggregate demand increases faster than long-run aggregate supply

Question 17

Which of the following would NOT shift the long-run aggregate supply (LRAS) curve?

Accepted Answer

A change in the price level

Question 18

If banks decide to hold more excess reserves and make fewer loans, what is the likely effect on the money supply?

Accepted Answer

The money supply will decrease

Question 19

Which of the following is a primary role of commercial banks in the economy?

Accepted Answer

Accepting deposits and making loans to borrowers

Question 20

Suppose the economy is experiencing stagflation. Which of the following best describes this situation?

Accepted Answer

High inflation and high unemployment occurring together, usually due to a supply shock

Aggregate Demand, Aggregate Supply, and Money: Study Notes for Principles of Macroeconomics

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