Q: According to the quantity theory of money, what is the formula for the inflation rate?

$\text{Inflation rate} = \text{Growth Rate of the Money Supply} - \text{Growth Rate of Real Output}$

Question 1

Which of the following best explains why the aggregate demand (AD) curve slopes downward?

Accepted Answer

Because higher price levels increase the real value of money holdings, encouraging more spending (Wealth Effect).

Question 2

Suppose the Federal Reserve increases interest rates. What is the most likely effect on the aggregate demand curve?

Accepted Answer

The aggregate demand curve will shift to the left because higher interest rates reduce consumption and investment spending.

Question 3

Which of the following would cause a movement along the short-run aggregate supply (SRAS) curve, rather than a shift?

Accepted Answer

An increase in the price level not caused by changes in input prices or technology.

Question 4

In the long-run aggregate supply (LRAS) model, what determines the level of real GDP supplied?

Accepted Answer

The number of workers, the level of technology, and the capital stock.

Question 5

If workers and firms expect the price level to increase in the future, what is the likely effect on the SRAS curve?

Accepted Answer

The SRAS curve will shift to the left.

Question 6

Which of the following is NOT included in the M1 measure of the money supply in the United States?

Accepted Answer

Small-denomination time deposits.

Question 7

A bank receives a $1,000 deposit and keeps 10% as reserves. What is the maximum amount it can lend out?

Accepted Answer

$900

Question 8

Which monetary policy tool is most commonly used by the Federal Reserve to manage the money supply?

Accepted Answer

Open market operations.

Question 9

According to the quantity theory of money, what is the formula for the inflation rate?

Accepted Answer

$	ext{Inflation rate} = 	ext{Growth Rate of the Money Supply} - 	ext{Growth Rate of Real Output}$

Question 10

If the money supply grows at 5% per year and real GDP grows at 2% per year, what is the predicted inflation rate according to the quantity theory?

Accepted Answer

$3\%$

Question 11

Which of the following is an example of an automatic stabilizer in fiscal policy?

Accepted Answer

Unemployment insurance payments that rise during a recession.

Question 12

Suppose the government increases its purchases by $100 million. If the marginal propensity to consume (MPC) is 0.8, what is the total change in real GDP according to the simple government spending multiplier?

Accepted Answer

$500 	ext{ million}$

Question 13

Which of the following best describes 'crowding out' in the context of fiscal policy?

Accepted Answer

Government spending reduces private investment by raising interest rates.

Question 14

If the U.S. government runs a budget deficit, what is the likely effect on national saving and investment?

Accepted Answer

National saving decreases, and investment may fall due to higher interest rates.

Question 15

Which of the following would shift the demand for U.S. dollars to the right in the foreign exchange market?

Accepted Answer

An increase in foreign investment in the United States.

Question 16

In an open economy, how does expansionary monetary policy affect net exports?

Accepted Answer

It lowers interest rates, causing the exchange rate to depreciate and net exports to rise.

Question 17

Which of the following is a goal of monetary policy pursued by the Federal Reserve?

Accepted Answer

Price stability.

Question 18

If the Federal Reserve wants to decrease the money supply, which action should it take?

Accepted Answer

Sell U.S. Treasury securities in open market operations.

Question 19

Which equation correctly represents the saving and investment relationship in an open economy?

Accepted Answer

$S = I + NX$

Macroeconomics Final Exam Study Guide: Aggregate Demand, Aggregate Supply, Money, and Monetary Policy

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