If the money supply is held constant, an increase in nominal GDP leads to ________ in the velocity of money.
Answer(s): D
The velocity of money, V, satisfies the equation, MV = GDP, where M is the money supply. If M is held constant while GDP increases, then V must increases. Intuitively, this says that if the money supply is not changed, then for production and consumption of a higher GDP, each dollar must change hands more frequently.
In the Keynesian model, if the multiplier is 3, then ________.
The expenditure multiplier is found by M = 1/(1-MPC). Therefore, 3= 1/(1-MPC) implies that MPC is .333)
If the government moves the entire tax schedule upward by 5%, the primary effect on the economy will be through:
Answer(s): B
It is important to realize that "the supply side answer" is not entirely accurate. The supply side effects become important when the marginal tax rates are skewed in such a way that additional productiveactivity is discouraged due to higher taxes. When the entire tax schedule moves, the effect through the demand side is much bigger.
An economy is currently experiencing high inflation. A Keynesian would suggest which of the following to combat this:
To control high inflation, Keynesians suggest cutting back on aggregate demand by either raising taxes or decreasing the size of the budget deficit by decreasing government expenditures. They thus recommend a restrictive fiscal policy to combat high inflation. Note that changing the reserve requirement is not an option available to the Federal government in the U.S. because the reserve requirement is set by an independent body, The Federal Reserve.
According to monetarists, ________ is a primary source of economic instability:
Monetarists believe that monetary policy has a powerful influence on the economy but also realize that there are lengthy and unpredictable time lags between the implementation of a monetary policy and the realization of its primary effects. Hence, they reject the active use of discretionary monetary policy for controlling the economy, prescribing a steady growth in money supply to track the real growth rate.
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