Q: If the nominal GDP is $ \$10{,}000 $ and the money supply is $ \$2{,}000 $, what is the velocity of money according to the quantity theory of money?

$ V = \frac{\text{Nominal GDP}}{\text{Money Supply}} = \frac{10{,}000}{2{,}000} = 5 $

Question 1

Suppose the government increases spending, leading to a rightward shift in the aggregate demand (AD) curve. In the short run, what is the most likely effect on output and the price level according to the AD/AS model?

Accepted Answer

Output increases and the price level rises.

Question 2

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

Accepted Answer

An increase in the price level reduces the real value of wealth, decreasing aggregate demand.

Question 3

If the Federal Reserve lowers the required reserve ratio, what is the expected impact on the money supply?

Accepted Answer

The money supply will increase because banks can lend out more money.

Question 4

Which of the following is NOT included in M1?

Accepted Answer

Savings deposits

Question 5

Consider the following scenario: The economy is experiencing stagflation. Which combination of policies would be most appropriate to address both high inflation and high unemployment?

Accepted Answer

There is no simple policy combination; policymakers face a trade-off between reducing inflation and reducing unemployment.

Question 6

If the nominal GDP is $ \$10{,}000 $ and the money supply is $ \$2{,}000 $, what is the velocity of money according to the quantity theory of money?

Accepted Answer

$ V = \frac{	ext{Nominal GDP}}{	ext{Money Supply}} = \frac{10{,}000}{2{,}000} = 5 $

Question 7

Which of the following best explains the concept of 'double coincidence of wants' in a barter economy?

Accepted Answer

Both parties must want what the other has to offer.

Question 8

A bank has $ \$1{,}000 $ in deposits and the required reserve ratio is 10%. What is the maximum amount the bank can lend out?

Accepted Answer

$ \$900 $

Question 9

Which of the following is a tool the Federal Reserve uses to conduct monetary policy?

Accepted Answer

Changing the federal funds rate

Question 10

If the Federal Reserve wants to decrease the money supply, which of the following actions would it most likely take?

Accepted Answer

Sell government securities in the open market

Question 11

Suppose the price level increases while nominal wages remain constant. What happens to real wages and what is the likely effect on aggregate supply?

Accepted Answer

Real wages decrease, and aggregate supply decreases.

Question 12

Which of the following is true about commodity-backed money?

Accepted Answer

It is backed by a commodity such as gold or silver.

Question 13

If the simple money multiplier is $ m = \frac{1}{rr} $ and the required reserve ratio $ rr $ is 0.2, what is the value of the money multiplier?

Accepted Answer

$ m = 5 $

Question 14

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

Accepted Answer

An increase in wages

Question 15

The Federal Reserve introduces a new tool that pays interest on excess reserves (IOER). What is the likely effect of increasing the IOER rate?

Accepted Answer

Banks will hold more reserves, decreasing the money supply.

Question 16

Which of the following is a function of money?

Accepted Answer

Medium of exchange

Question 17

If the Federal Reserve wants to stimulate economic growth during a recession, which monetary policy should it implement?

Accepted Answer

Expansionary monetary policy

Question 18

Which of the following best describes the moral hazard problem in banking?

Accepted Answer

Banks may take excessive risks because they expect to be bailed out by the government.

Question 19

If the growth rate of the money supply is 4% and the growth rate of real GDP is 2%, what is the expected inflation rate according to the quantity theory of money ($ \%\Delta M + \%\Delta V = \%\Delta P + \%\Delta Y $), assuming velocity is constant?

Accepted Answer

$ 2\% $ (since $ 4\% = \%\Delta P + 2\% $ so $ \%\Delta P = 2\% $)

Question 20

Which of the following would be considered an asset on a bank's balance sheet?

Accepted Answer

Loans made to customers

Macroeconomics Study Notes: AD/AS Model, Money & Banking, and Monetary Policy

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