Question 1

According to the classical quantity theory of money, if the money supply ($$M) $$increases by 10% and the velocity of money ($$V) $$and real output ($$Y) $$remain constant, what is the expected percentage change in the price level ($$P$$)?

Accepted Answer

10%

Question 2

Which of the following best describes the concept of money neutrality in the classical model?

Accepted Answer

Changes in the money supply only affect nominal variables, not real variables.

Question 3

Suppose nominal GDP is $$\20$$,000$$ billion and the money supply (M$) is $$\$$2,500$$ billion. What is the velocity of money ($$V$$)?

Accepted Answer

$$V = 8$$

Question 4

If the economy is at full employment and the central bank increases the money supply, what does the classical model predict will happen in the long run?

Accepted Answer

The price level will rise proportionally, but real output will remain unchanged.

Question 5

According to the Fisher equation, if the nominal interest rate ($$i) is 6$$% and the expected inflation rate ($$m^e) is 2$$%, what is the expected real interest rate ($$r$$)?

Accepted Answer

$$r = 4\%$$

Question 6

Which of the following statements about the velocity of money ($$V) in $$the classical model is correct?

Accepted Answer

It is assumed to be constant in the long run.

Question 7

If the money supply grows at 5% per year and real GDP grows at 3% per year, what is the predicted inflation rate according to the quantity theory of money?

Accepted Answer

2%

Question 8

In the classical theory of money demand, what is the primary motivation for holding money?

Accepted Answer

Transactions demand

Question 9

Suppose the government increases its budget deficit by increasing spending without raising taxes. According to the classical model, what is the likely effect on private investment?

Accepted Answer

Private investment will decrease due to crowding out.

Question 10

Which of the following best explains why quantitative easing (QE) after the 2008 financial crisis did not immediately lead to high inflation in the U.S.?

Accepted Answer

The money multiplier decreased, so the increase in the monetary base did not translate into a large increase in the money supply.

Question 11

If the expected inflation rate rises, what does the Fisher equation predict will happen to the nominal interest rate, all else equal?

Accepted Answer

It will increase by the same amount as the expected inflation rate.

Question 12

Which of the following is a key assumption of the classical model regarding output in the long run?

Accepted Answer

Output is determined by real supply-side factors and is fixed at full employment.

Question 13

In the loanable funds model, what is the effect of an increase in the real interest rate on savings and investment?

Accepted Answer

Savings increase and investment decreases.

Question 14

If the government finances its deficit by borrowing from the central bank (monetizing the deficit), what is the likely long-run effect according to the classical model?

Accepted Answer

It will lead to higher inflation.

Question 15

Which of the following best describes the efficient markets hypothesis as discussed in the classical model?

Accepted Answer

Asset prices reflect all available information and cannot be consistently predicted.

Question 16

Suppose the nominal interest rate on a 10-year Treasury bond is 3.4% and the real interest rate on a 10-year TIPS is 1.0%. What is the market's expected average inflation rate over the next 10 years?

Accepted Answer

2.4%

Question 17

Which of the following policy recommendations is most consistent with the classical model?

Accepted Answer

Monetary policy should follow non-discretionary rules targeting price stability.

Question 18

If the price level ($$P) $$increases while real output ($$Y) $$and velocity ($$V) $$remain constant, what must happen to the money supply ($$M) $$according to the equation of exchange?

Accepted Answer

$$M$$ must increase.

Question 19

Which of the following is NOT a reason why the Phillips Curve may appear flat in recent years, according to the study materials?

Accepted Answer

Frequent discretionary fiscal policy interventions.

Question 20

In the classical model, what is the effect of an increase in the transactions demand for money on the money demand function $$M^d = kPY$$?

Accepted Answer

The value of $$k$$ increases, raising money demand at each level of income.

Classical Model II: Money, Interest, and Prices

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